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Short Selling A Stock Is A Lot Like "Mean Girls"

Makes sense since high school and Wall Street are pretty much the same.

Posted on June 13, 2013, at 8:00 a.m. ET

So you've decided to short a stock.

First, choose a stock that you think will underperform – one that's going to go down in value soon.

In essence, you're selecting one of the less promising stocks on the market.

Deciding which stock to short is not always obvious.

You could just watch the markets or listen to an analyst.

Don't go for the companies whose stock is clearly rising.

Go for the ones you've been hearing bad things about.

From the company's perspective, being shorted isn't great. They generally don't want to appear less than desirable.

Once you've selected a company to short, you ask a broker to lend you shares of the underperforming stock.

At this point, the shares you're borrowing are sold and the proceeds go to your account.

Still following us?

Over the course of the loan, you better hope everyone continues to hate on your stock, driving the share value down.

Because at some point you'll have to close on your short and buy your shares back.

If the share value has gone up, you'll have to buy back your investment at a higher price...

In addition to having to pay the lender any dividends or rights over the course of the deal.

Thus losing you money on your investment.

But if you were really smart...

And the stock went down in price...

You can buy back your shares at a lower price.

And make a lot of money in the process.

Nice work.

Now do it all over again next time.

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