Stocks & Commodities V. 31:7 (39): Q&A by Don Bright

Q&A by Don Bright

Short selling revisited

You have written previously about the idea of selling stocks short. I think I understand the concept of profiting when a stock’s price goes down, but I still am unclear on some things. Perhaps you can help me. I remember from years ago something about an uptick rule. A friend told me recently that we don’t need to worry about that rule any longer. To be honest, I’m not even sure what that term means; is it something I need not worry about these days?

Another question is about stocks that cannot be shorted because they are “hard to borrow.” What does this mean? Is this something that would affect my desire to sell stocks short to make money on the downside? I think the market is way too high and will likely go down soon.

— Jlong, Denver, CO

Okay, my friend, first off I have to respond to your last comment about the market being too high. The Street is paved with ex-traders who thought the market was too high about 3,000 Dow points ago! Be careful with your directional trading. Picking direction (stubbornly, especially) is how we lose new people from time to time. You might check Tesla Motors (TSLA) as an example of a “short squeeze” (look back at a May 2013 chart of TSLA).

Regarding your questions about short selling and the details of how it all works: Traders tend to think of buying and selling simply as entry and exit points. Sometimes we buy first, then sell. Sometimes we sell (short) first, then buy back. It doesn’t make much difference to us, since stocks tend to go up and down each day, week, month, and so on. If I buy something at $30.40 and sell it at $30.90, I make 50 cents on, say, 1,000 shares, or $500. If I sell (short) something at $30.90 and buy it back at $30.40, I again make the same $500. That part is pretty straightforward.