Simulator How-To Guide: Short Selling
  1. Simulator How-To Guide: Introduction
  2. Simulator How-To Guide: The User Interface Tabs
  3. Simulator How-To Guide: Purchasing Stocks
  4. Simulator How-To Guide: The Portfolio Summary Page
  5. Simulator How-To Guide: Ticker Symbol Look Up
  6. Simulator How-To Guide: Stock Quote Information
  7. Simulator How-To Guide: Diversified Portfolio
  8. Simulator How-To Guide: Selling Stocks
  9. Simulator How-To Guide: Advanced Trade Types
  10. Simulator How-To Guide: Short Selling
  11. Simulator How-To Guide: Covering Short Positions
  12. Simulator How-To Guide: Cancelling Orders
  13. Simulator How-To Guide: Margin Accounts
  14. Simulator How-To Guide: Buying Options
  15. Simulator How-To Guide: Options Usage
  16. Simulator How-To Guide: Conclusion

Simulator How-To Guide: Short Selling

Most small investors cringe at a bear market when it seems like all stocks are in a steady decline. There is, however, a technique to profit from falling stock prices called "selling short", or short selling. Essentially, short selling is a type of order in which an trader sells borrowed securities in anticipation of a price decline and is required to return an equal amount of shares at some point in the future.

Understanding a short sale may be difficult at first, so let's use a simplified example to help explain it. Suppose you believe that shares of Microsoft Corporation (Nasdaq: MSFT) are overpriced and are likely to decline in the future. In order to profit from this expected price drop, you'll need to short MSFT stock. To do so, you borrow shares from someone else (your brokerage facilitates this) and then immediately sell them on the open market. Suppose you short sell MSFT at $25 per share today, and in two weeks time it is trading at $20 per share. At this point, you "cover" your short position by purchasing MSFT shares and returning them to your lender (your brokerage). Since the stock's price fell, you will profit by $5.00 (not including transaction costs) for every share of MSFT you shorted (Read our Short Selling Tutorial for more details on short sale trades).

Short Selling on the Simulator
Let's walk through a short sale trade with the Stock Simulator. As usual, go to the Trading screen by clicking on the Trade Stock link. Enter the following trade details as shown:


As you can see, we want to make our Transaction type a Sell Short for 100 shares of MSFT at the current market price. In other words, we are telling our broker we wish to borrow 100 MSFT shares from them and sell them immediately at the current market price. Click on Preview Order and then Submit Order to confirm your short sale instructions.

Once your trade goes through (it may be as soon as 20 minutes or the next business day depending when your order was submitted), you'll be able to see MSFT listed in the Shorted Stock Portfolio section of your Portfolio Summary as shown below:


Basically, your "shorted" stock holdings are reported in your Portfolio Summary in the same way as the stocks you own (your "long" positions), with the only difference being the gains and losses reported for your shorted stocks are opposite in nature to your long holdings. This means that as the price drops for a stock you have shorted, your gains will increase.

In our next section, we will explain the necessary steps on how to close or "cover" your short position.

Simulator How-To Guide: Covering Short Positions

  1. Simulator How-To Guide: Introduction
  2. Simulator How-To Guide: The User Interface Tabs
  3. Simulator How-To Guide: Purchasing Stocks
  4. Simulator How-To Guide: The Portfolio Summary Page
  5. Simulator How-To Guide: Ticker Symbol Look Up
  6. Simulator How-To Guide: Stock Quote Information
  7. Simulator How-To Guide: Diversified Portfolio
  8. Simulator How-To Guide: Selling Stocks
  9. Simulator How-To Guide: Advanced Trade Types
  10. Simulator How-To Guide: Short Selling
  11. Simulator How-To Guide: Covering Short Positions
  12. Simulator How-To Guide: Cancelling Orders
  13. Simulator How-To Guide: Margin Accounts
  14. Simulator How-To Guide: Buying Options
  15. Simulator How-To Guide: Options Usage
  16. Simulator How-To Guide: Conclusion
RELATED TERMS
  1. Short Covering

    Buying back borrowed securities in order to close an open short ...
  2. Short Sale

    A market transaction in which an investor sells borrowed securities ...
  3. Short Selling

    Short selling is the sale of a security that is not owned by ...
  4. Buy To Cover

    A buy order made on a stock or other listed security that closes ...
  5. Weak Shorts

    Traders or investors who hold a short position in a stock or ...
  6. Short Sell Against the Box

    The act of short selling securities that you already own. This ...
RELATED FAQS
  1. Why does my broker allow me to enter only day orders for short selling?

    Put simply, brokerage firms restrict short sales to day orders because of the complexity of the short sale transaction and ... Read Answer >>
  2. Why do you need a margin account to short sell stocks?

    The reason that margin accounts and only margin accounts can be used to short sell stocks has to do with Regulation T, a ... Read Answer >>
  3. Please explain what a short seller is on the hook for when he or she shorts a stock ...

    Short selling is hard enough to get your head around without getting into all the particulars. If you have a basic understanding ... Read Answer >>
  4. Under what circumstances is short selling advisable?

    Find out when short selling a stock is profitable and what an investor should keep in mind before deciding to pursue a short ... Read Answer >>
  5. How can you lose more money than you invest shorting a stock? If you have no money ...

    The simple answer to this question is that there is no limit to the amount of money you can lose in a short sale. This means ... Read Answer >>
  6. Can you short sell stocks that are trading below $5? My broker says that I can't.

    Short selling can be very risky for both the investor and the broker. Brokers will often tell investors that only stocks ... Read Answer >>

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