Discover How to Make Money Shorting Stocks

The stock market can be an extremely exciting place… though it seems like this is how it works for many people.

  • If you are in the stock market, you hate it and are probably losing money.
  • If you aren’t in the stock market, you feel you are missing out on easy money.

I’ve been on both sides of the fence. I’ve been trading stocks since I was in high school, so I am quite familiar with the ups and downs and how everything works. It’s extremely easy to setup a stock trading account with sites like ETrade, Scottrade and Ameritrade and you can start trading stocks from home with only a couple hundred dollars in your account. All you need to pay is the stock value price and a trading fee every time you place a trade, which is usually around $10.

The concept of trading stocks is quite simple as well. You can buy stocks in nearly every popular company and established brand out there. You simply find their stock ticker symbol, decide how many shares you would like to buy, then sell the stock when it goes up for a profit. It sounds easy enough, yet so many people lose money in the stock market.

With that said, I will move on to my next two points…

  1. What is short selling stocks?
  2. Investing through guidance of others

Buying Stocks vs. Short Selling Stocks

The vast majority of people will BUY stocks to try and make money, this simply means that you are betting that the stock goes up in price. There is also something called “SHORTING” stocks, which is something I’ve tried my hand at over the past few years. When shorting a stock, you are still buying it at it’s currently share price, but you are betting that the stock goes down in value. If it goes up, you will lose money.

To better explain the process, Shortzilla.com provides the example below for us.

Example: XYZ stock has deteriorating fundamentals and you believe the stock will decrease in value. XYZ stock is currently trading at $100 per share. You decide to short 100 shares of XYZ @$100 per share. In order for this transaction to take place, you borrow the 100 shares from your brokerage. The transaction looks like this.

  • Borrow 100 Shares and Sell Short @ $100 per share.  Proceeds from Sale = $10000
  • Shares of XYZ rise to $120 per share. The stock is obviously moving in the wrong direction, and you decide to close out your short.  In order cover your short position, you will need to purchase XYZ shares in the open market.
  • Your loss on the transaction is $120-$100 * 100 shares = $2000.

While many people can make a lot of money with shorting stocks, it can be quite scary if the stock you are betting against continues to go up. This could result in a massive loss if a stock skyrockets when you are betting against it, and for this reason, many short sellers will look for quick gains and get in and out of stocks they are shorting.

Investing Through the Guidance of Others

Some of you are probably scratching your heads and have no idea what I am talking about, while others are intrigued and interested in getting started. Either way, there is a learning method for you. The stock market and investing is no joke. You can give all your money to a bank or investment company to manage your money, or you can do it yourself. One of the growing trends lately is that people are joining stock alert services which tell them what stocks to buy/sell and when. All you need to do is simply subscribe to their monthly services and follow their email/text alerts on when they buy and sell. I have been doing this and wrote about these types of services in the past from Tim Sykes and Jim Cramer. Most of these services will cost anywhere from $49-$100+ per month.

Another site that has been doing well and growing fast as of lately is Shortzilla.com, which is a combination of everything we discussed above. They offer learning tools, a forum area and alerts on when to buy/sell stocks, and they mostly focus on short selling and getting in and out of stocks fast for a quick gain. You can see a chart of some of their previous closed trades below.

The stock names and symbols have been blurred, as this is for their members only to see, but you can still understand how the trading system works. There will also be profits and margins here and there, but in the long run most of these alert services are quite profitable. As a member, it’s up to you to learn about the stocks you are trading in, how to trade and make sure you place the trades right when you receive your alerts. Having an app for trading on your mobile device and receiving stock alerts through text is the best way to do this.

Buying & Shorting Resources

For anyone who isn’t ready to make the plunge and start investing with your own money, there are plenty of resources out there to trade with play money and to learn what has worked in the past for others and how to spot trends in the market place. Shortzilla has provided us with an excellent selection of stock buying and selling resources below.

From Shortzilla:
What Is Short Selling? – Our primer on the basics of shorting stocks.
What’s a Short Squeeze? – Don’t get caught in a short squeeze!
The Benefits of Short Selling- We discuss some of the exploitable inefficiencies in shorting stocks.

Links
Link to SEC Accounting Enforcement Releases

White Papers
The Financial and Market Effects of the SEC’s Accounting and Auditing Enforcement Releases

Suggested Articles on Short Selling:
Short Selling Stocks: Is it Time? by Dr. Steve Sjuggerud
How to Play the Short Game from the Financial Times
Jim Chanos on Short Selling from Market Folly
Kathryn Staley Video on Art of Short Selling
Knowing the Rules of the Shorting Game by Jim Cramer
Joining The Dark Side by James Montier
Shorting a Stock: 20 Investment Lessons From Life Partners by Harry Beck (@Seeking Alpha)
What Short Sellers Know (study of Short Interest) by Alpha Now- Thomson Reuters
Cash Doesn’t Lie all about Accruals..

Book Recommendations:
The Art of Short Selling by Kathryn Staley
Quality of Earnings by Thornton O’Glove
Short Selling: Strategies, Risks, and Rewards by Frank Fabozzi

Tools
Short Interest Data
Short Interest Publication Calendar 2012

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13 Comments

  1. HI Zac, good info on shorting stocks. I prefer buying them on the way up. But everyone has a different preference.

    I think Tim is more into shorting Penny Stocks, isn't he? I guess it works pretty much the same way though.

    Who is your favorite broker out of the few that you mentioned Zac?
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    1. Right, Tim mostly shorts stocks now, but he does some buying here and there. I really liked ThinkOrSwim, then Ameritrade bought them… and they are both pretty much the same now. Etrade is also good. Both are good for long term trades, and they have nice mobile apps. I've also used Scottrade and SogoTrade. If you are going to be jumping in and out of stocks or doing day trading, I would check out these sites and what they are recommending. Some places trade faster and have lower pricing.

      1. Zac,

        I have been using Ameritrade for about 6 years now and they are excellent. I also have used Scottrade but they seemed to only fill part of my orders. I had to constantly put in an AON and when I did that I wasn't getting my orders through. When I saw this happening I switched over to TDAmeritrade permanently and am having no problems.

        Adam
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  2. Good post, Zac. The Art of Short Selling is a great book, highly recommended.
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  3. I'm zero about stock market, but after reading your post I find out that there are good resources which can actually helps you to make money. Still it's quite difficult for me to take risk as I've no about stock trading.
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    1. Correct, I was in the members are at the time of making that screenshot, and didn't know that it was public information at the time. Thanks.

  5. Zac,

    There is very HIGH RISK with shorting stocks. I'll explain,

    for a regular stock purchase, if you buy @ $10/share and you buy 100 shares, you've got $1000 invested. How much can you lose on that? At the most, $1000.

    If you short sell the stock @ $10/share (basically selling the stock) there is NO LIMIT to how much you could lose. If the stock goes away from you… Say goes to $20 or $40 or $50 or …. (you get the picture). There is logically no limit to what you can lose!!!

    Be careful and if you do this, ONLY do it short term.

    Ed

    1. Agreed, this is why I mentioned that most people don't stay short on stock for the long term, as they are looking for a quick in and out.

      1. The only luck I've ever had in the market was with short-term shorts, but the biggest problem I ran in to was the day-trading limitations they put on small-time investors. It's been a while, but it was something like you complete a transaction (buy and sell) within 4 business days more than twice a week, you need at least $25,000 in your account as collateral. Not sure of the details or if the rules have changed since then.

        They claimed it was to help the little guy and prevent him from getting burned in day trading, but it actually just ended up hurting my ability to be quick and flexible.
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  6. I honestly don't have an idea about STOCKS and how it works. But after reading this insightful post of yours, I learned.
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    1. If you really think that you have learned enough about stocks, just by reading this article, then you must be really Dumb!

  7. Mika, I too have the same problem like you. And therefore, such posts help or give the proper insight and from that one can really get ideas about what he / she was not aware.

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