Selling Short - Making money when markets go down!
The time honored method for profiting in the market, we are told, is to "buy low and sell high". Can't argue with that. The logic is absolutely irrefutable.
What we are not often told, however, is that the "buy low" part doesn'tnecessarily have to precede the "sell high" part. Hence, the short sale or selling short!
Think about it. If you "sell high" first and "buy low" later, haven't you accomplished the same thing? Only in reverse order? Of course, you have.
Doing the math: (2 - 1) = 1, while (-1 + 2) = 1. The answer is the same.
Applying that logic to trading, "buy low, sell high" or "sell high, buy low", the result is the same. Smart traders understand this. Are you smart?
When all is said and done, the only thing that matters is that as long as your "buys" are below your "sells" you will be profitable and nobody cares which came first, the "buys" or the "sells".
In other words, what's important is the timing of the transactions.
You may have heard that, in real estate, it's location, location, location. In trading the markets, it's timing, timing, timing. Don't let anyone tell you different!
The only reason to buy a stock is that you expect it to go up. If you don't expect it to go up, why buy it?
Contrarily, if you expect a stock to go down, don't just sit there and watch while it drops. How does that profit you? Sell it short!
If you really expect a stock to decline in price, then logically, selling short dictates that you should sell at the current price and buy it back at some time in the future at a lower price.
Is this really any different from buying at the current price and then selling at some time in the future at a higher price? The profit is the same, either way. Buy/Sell, Sell/Buy, what difference does it make?
What are your thoughts on this subject? Share them!
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