Episode 36: Jonk’s Guide to Short Selling.
As the songwriter Eagle-Eye Cherry once said, “Go on and close the curtains, ’cause all we need is candlelight.” You’ll want to cozy up to listen to the first installment of Tim and Stephen’s three-part series on a deeply sexy subject: a guide to short selling.
The Steady Trade Podcast has received a lot of requests about an episode on short selling. To offer a comprehensive overview, we’ve put together a three part mini-series on the art of short selling, including what it is, how to identify patterns, and what is the best approach to take when short selling penny stocks. Here’s part one.
What is short selling? The idea behind short selling is that you can profit when stocks are going down. It’s not illegal or unethical; if you listen to our episode on Jesse Livermore, you’ll discover that this is a trading trick which has been employed basically since forever (or at least for over 100 years).
Basically, you can borrow shares from a broker, and then sell them before you buy them back, taking a negative position. So, if you were to short 1,000 shares, you’d see -1,000 shares (yes, that’s a negative sign) in your account. If the trade works and the stock drops, you buy those stocks back which gives you a zero position. You buy them at a lower prices but buy them back slightly lower, so you net the difference.
The easiest way to understand is that you’re still buying, and you’re still selling; you’re just reversing the timeline.
How short selling works. In the episode, you’ll gain a broad overview of how to approach short selling. While in theory you’re still buying low and selling high, you’re simply reversing the timeline. It can be tricky for many traders to wrap their mind around this concept, so Tim and Stephen really break it down with specific examples.
They also discuss how short selling can prove tricky. Since you do have to borrow shares from a broker, it’s an imperfect art; those shares aren’t always readily available. They discuss the hows and whys of this, and offer an education on how brokers too can benefit from short selling. Moreover, you’ll gain a good understanding of the basic mechanics of short selling.
Getting started with short selling. Are you interested in pursuing short selling? Not so fast. As Austin Powers once said, “I like to live dangerously”. While many traders like to embrace risk, when it comes to short selling penny stocks, the risk can be quite high. Where you have the potential for unlimited earning, you also have the potential for unlimited losses.
As both Tim and Stephen caution, there are plenty of risks to take into account with selling penny stocks. They go over some of the biggest risks and errors that traders make, and offer suggestions for how to get started. While it may not be glamorous advice, for instance, both of them suggest starting with paper trading or spreadsheets. In the episode, you’ll learn why they caution to never make your first short sell an actual one with real money, because they can get really scary really fast!
In the episode, you’ll also learn about what types of accounts are necessary to sell short, and why it’s necessary to have a margin account.
Rules and regulations. While short selling is legal, it does come with some regulations. Tim and Stephen discuss some of the rules and regulations that come with short selling penny stocks, including the so-called “$2.50 rule”. In the episode, you’ll gain an understanding for the sometimes annoying yet ultimately helpful rules that are inherent to short selling.
Moreover, in this episode you’ll gain a basic understanding of the art of short selling that will aid you on your trading journey. Stay tuned for the next episode in this short selling series, where Tim and Stephen will begin to discuss specific setups and how to avoid the dangers that come with short selling!
Curious about something?
Do you have questions about short selling, or any other topic covered on the show? Be sure to visit the “submit your audio” portion of the website to ask anything. You might just be featured in an upcoming episode!
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