Rowan Student Investment Group Shorting a stock September 19th, 2017

Introduction In general, people think of investing as buying an asset, holding it while it appreciates in value, and then eventually selling to make a profit. Shorting is the opposite; an investor makes money only when a shorted security falls in value. Shorting a stock is a valuable tool to make money during a bear market Many investors make money on a decline thanks to short selling.

Going Long vs. Going short Going long on an investment means that an investor has bought a stock believing that it’s price will rise in the future. The opposite is going short, which is when an investor anticipates a decrease in share price. Shorting a stock is the sale of a stock that you don't own. When you sell short a stock your broker will lend you a security. The shares are then sold and the proceeds are credited to your account. Sooner or later you must "close" the short buy buying back the same number of shares (called covering) and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money.

Why Should You Short? Speculation: perhaps you are positive of a stocks demise, and you want to profit off that. To Hedge: by going long and gong short on an equity, you are minimizing risk by taking two inversely correlated positions.

Restrictions on Shorting Shorting is subject to many restrictions on the size, price, and types of stocks you are able to short. For example, you may not short sell penny stocks and most short sales need to be done in round lots (usually 100 shares). The NYSE and NASDAQ have rules preventing short selling unless the last trade of the stock is at the same or higher price (known as an uptick or zero plus tick). These rules exist so that investors can't sell short in a declining market, as continuous short selling will make a falling stock keep falling

Example of a Short Sale Imagine you want to short Microsoft (MSFT), currently trading at $65 The Stock Price Sinks to $40 Borrowed 100 shares of MSFT at $65 = $6,500 Bought Back 100 shares of MSFT at $40 = $4,000 Your Profit = $2,500 The Stock Price Rises to $90 Bought Back 100 shares of MSFT at $90 = $9,000 Your Loss = $2,500

Risky Business Shorting is very, very, risky. History shows us that in general, stocks have an upward drift and over the long run most stocks appreciate in price. What this means is that shorting is betting against the overall direction of the market. Your losses are infinite. A short sale loses when the stock price rises, and a stock can theoretically can rise infinitely. On the other hand, a stock can't go below 0, so your upside is limited. Shorting stocks involves using borrowed money, otherwise known as margin trading. it's easy for losses to get out of hand because you must meet a minimum maintenance margin of 25%. If your account slips below this you'll be subject to a margin call and will either have to put in more cash or liquidate your position.

Risk continued If a stock starts to rise and a large number of short sellers try to cover their positions at the same time, it can quickly drive up the price even further. This phenomenon is known as a short squeeze. Being right too soon! Even though a company is overvalued, it may take a long time for it to come back down. In the meantime you are vulnerable to interest, margin calls, and being called away. Tesla is a perfect example of an overvalued stock that continues to rise.

Stock Highlight Nvidia Corporation is an American technology company. It designs graphics processing units for the gaming and professional markets, as well as system on a chip units for the mobile computing and automotive market. Stock price: NVDA (NASDAQ)$187.35 + $124.51 (+198%) over the past year Red-hot Nvidia gets its most bullish Wall Street call yet due to A.I. Evercore ISI is optimistic about Nvidia's market opportunity in artificial intelligence after meeting with the company's management. "We are only at the cusp of AI's growth potential and NVIDIA is creating THE AI computing industry standard," the firm says. It raises its price target for Nvidia to $250 from $180.

Market Discussion Toys R Us in Bankruptcy! Worries among other toy manufacturers (Mattel, Hasbro) The hate on cryptocurrencies Crypto prices have fell in the past week as China strengthens regulations against transactions Dollar is starting to rebound Gold prices are falling Mircrochip stocks (AMD; NVDA) are up China is pushing hard towards AI Student debt is delaying millennial homeownership by 7 years FOMC meeting this week Fed starts to announce how they will unload $4.5 trillion balance sheet

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