Short Selling A basic look at this Confusing, yet simple Investment strategy Bulls4Bears

Who should short sell? Short selling is a more advanced investment strategy. It should be executed only by individuals that understand the markets and individuals who would take additional risks. This strategy, although simple in nature, is very confusing to a lot of individuals. After viewing this presentation you will understand: What short selling is How it works Caution: This presentation will not make you an expert. As always, speak with your financial advisor before making any investment decisions. Riskier Investors Investors with a firm understanding of short selling Investors that have discussed short selling with their financial advisor

What is short selling? Short selling is the investment process of borrowing a good from others, but later returning the good later. The idea here is to borrow high and return it low. For every unit this good goes decreases, you will earn a unit. For every unit the good increases, you will lose a unit. When shorting stocks, you will sell the stock when you believe the price of the stock is too high. Believing the stock is too high, you would want to take advantage of this and earn money while that markets push the stock down to its “fair value.” In other words, you believe the stock is over valued and you want to make money as it decreases in value. If you own the shares that you short, the short sell is said to be “covered.” If you borrow the shares from another person to short sell this is known as a “naked” short sale. Hey, we could not make that up.

Caveats Short selling is risky. The risky nature is exponentially greater when this investment style is performed on margin. Most short selling is through margin accounts. If the price goes up you will lose money. If it rises too much you will have to buy the shares back at a higher price. Losing money is never good.

Basic example This is an example of a good short sell. Stock XYZ $80 Jane believes that the stock XYZ is over valued based on her research and wants to short sell it. She calls Will, her advisor, and they agree that is an acceptable trade. Jane sells 100 shares at $80. Jane does not receive the $8,000 from the sell because she did not own the stock she sold, she borrowed it. One month passes and XYZ sinks to $60. Jane calls Will and tells him to cover her sale because she believes the stock is fairly valued. She buys the 100 shares at $60 for a total of $6,000 and pockets the remaining $2,000. Stock XYZ $60 $80 x 100shares = $8, This example assumes no transactions costs in order to simplify it. $60 x 100 shares = $6,000.00

Basic example This is an example of a bad short sell. Jane believes that the stock XYZ is over valued based on her research and calls her financial advisor Will. Will agrees that the stock price is high and short sells 100 shares of XYZ at a price of $80. Jane on paper received the proceed of $8,000. Two days later XYZ corp. comes out with a magic widget that everyone will need. This news sends the price of XYZ upwards around $110. Jane calls Will and tells him to cover her position immediately. She buys the stock at $110 to cover her position and is out $3,000 ($30 x 100 shares). Again, we assume no transactions costs to simplify this example.

Picture is worth what? Another way to look at short selling is illustrated below: 1 st Sell High 2 nd Buy Low 2 nd Sell High 1 st Buy Low Short Selling Normal Investing Theory

Conclusion Typically, if the overall market is declining and the industry, of the short selling stock, is in peril, you should earn money on the short sell. Combining your individual research, understanding of short selling, and understanding of the economy/markets will make you a better investment decision maker. We can not stress the point of individual research and discussing this style of investing with your financial advisor.