If you’ve ever how to short stocks that the price of a stock would drop, you might consider betting against it. There are several ways to do so, including short selling shares and purchasing put options. However, most traders are more familiar with the basic process of how to short stocks, which involves borrowing shares and selling them with the expectation that they’ll repurchase at a lower price, returning them to their broker, and keeping the difference, minus loan interest, as profit.
The most common way to short a stock is by physically selling it. However, it’s also possible to sell short a stock via derivative instruments like options and ETFs. The exact method you choose will depend on your individual trading strategy.
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One advantage of physical selling short is that the potential loss is limited to the number of borrowed shares you sell. With a long position, on the other hand, there’s no upper limit to how much you can lose if the stock continues rising.
In general, professional traders seek out stocks that they believe will decline in price, based on fundamental analysis, or broader market trends. They may look at a company’s slowing EPS and revenue growth, rising input costs that strain margins, negative news, or other factors.
Another important function of shorting a stock is to keep unbridled enthusiasm in check. In addition, short sellers can help bring new information to light – such as fraud or aggressive accounting – that might otherwise be concealed.