Simulator How-To Guide: Short Selling
AAA
  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. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  2. Indicator

    Indicators are statistics used to measure current conditions ...
  3. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  4. Bid Wanted

    An announcement by an investor who holds a security that he or ...
  5. Mass Index

    A form of technical analysis that looks at the range between ...
  6. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...
  1. What are some examples of different taxable events?

    Learn what a taxable event is and how it affects investors and taxpayers with examples of taxable events that can result ...
  2. How do I implement a forex strategy when spotting a Upside Gap Two Crows Pattern?

    Learn about the upside gap two crows chart pattern and how to use this bearish reversal signal to create profitable trade ...
  3. What are the best technical indicators to complement the Triple Exponential Moving ...

    Learn about some of the best technical indicators that can be used to complement trading with the triple exponential moving ...
  4. What is a common strategy traders implement when using the Vortex Indicator (VI)?

    Take a look at some basic trading strategies that can be implemented with the vortex indicator, a technical tool used to ...

You May Also Like

Related Tutorials
  1. Bonds & Fixed Income

    Investing For Safety and Income Tutorial

  2. Economics

    American Depositary Receipt Basics

  3. Investing Basics

    Stock Basics Tutorial

  4. Active Trading Fundamentals

    Introduction to Stock Trader Types

  5. Trading Strategies

    Guide to Pairs Trading

Trading Center