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Borrowing, CEO, CFO, Invest, Investing, Loss, Lulemon, news, Options, portfolio, Profit, Sale, Shorting, Stocks, Think, Twitter, win, Yoga
This week I will be covering how to short a stock and what this entails.
Shorting-
The first way to take advantage of a possible price drop is to short the stock. This is the opposite of buying a stock (what you would do when you think the price will increase). When you short a stock, what you are technically doing is selling a stock that you do not own. The point of this is that you sell the stock when it is at its current market price (or at a limit price that you set) and then buy the stock at a lower price. By doing this, you are able to make a profit on the difference. You may be thinking: “how exactly can an investor sell shares that they do not have? It doesn’t make sense.” How this works is, when you short a stock you are borrowing the stock to sell from a broker. Your broker lends you the stocks to sell and then you owe him these stocks. The stocks are a promise to be delivered and when you buy the stocks at a later time, you even out the borrowing. You do not actually get the money that you sell the stocks for as you still have to buy the stocks back as they were never yours to sell in the first place. They were borrowed and you owe your broker however many stocks you borrowed and must buy them at a later time. If the price lowers like you expected, you can buy them back for a lower price and get to keep the difference as a credit to your account between the price you sold for and the price you paid to buy back. If the stocks go up in price, you may end up buying back at a higher price than you originally sold them at. In this case, you have a loss and the money will be subtracted from your account. When the investor buys the stocks it is called “closing” the position as he/she no longer owes shares.
Lulemon Example 
For our example, we will use Lulemon Athletica Inc. This morning, Lulemon lowered their outlook and expectations for the fiscal year and quarters, and also announced their CFO was leaving. This is never good news and because of these reductions, shareholders jumped off ship and the stock plummeted. It is down almost 15 percent today. Now if I had expected that Lulemon was overpriced I may have decided to short the stock. Let’s assume that my timing was near perfect and I decided to short the stock yesterday night before closing when the stock was priced at $44.30. If I shorted 1000 shares of Lulemon, I would have been paid $44,300 for the shares. However, keep in mind that this is not an actual payment to you as the shares are purely borrowed. After seeing the massive plunge in price today, I would likely decide to buy the stocks back as I feel that their price is low enough that I would see a great profit and want to take advantage before the stock possibly increases in price again. Right now, the price is around $37.40. I would close my open position with my broker by purchasing 100 shares of this stock at this price. My position is now closed and I now own zero shares of the stock. Previously I owned negative 1000 shares of the stock (borrowed) and after buying 1000 shares to close out the position I sit at zero shares. So what is my profit or loss? My profit (because the stock decreased) is the difference between the price I sold it at and the price I bought it at multiplied by the amount of shares. In this case my profit comes out to ((44.30-37.40)*1000) $6900. This is a good example of how to use shorting to make a profit off of bad stock news.
Twitter Example- 
Unfortunately for us, we may think a stock is going to decrease in price but it may not end up happening. In this case, an investor could face a potential loss from shorting a stock. In the same way that a stock decreasing in value is bad if you bought a stock, a stock increasing in value is bad if you shorted one. To show the potential dangers of shorting a stock I will use Twitter as an example. The COO of twitter resigned this morning following disagreements with the CEO. The resignation of any major well liked executive can often have a negative impact on a company and because of this it is possible that an investor would try to short Twitter and gain a small gain off of this stock news. The investor may have borrowed and sold 1000 shares of this stock at the opening of the market this morning at a price of $35.06 expecting the stock to drop after this news broke early this morning. However, the stock price has actually risen nearly 4 percent already today. Fearing an even greater spike in price, the investor may have bought back the stocks at 12.45 pm at a price of $36.77. After closing out his position, the investor has accumulated a loss of ((36.77-35.06)*1000) $1,710. This not only proves that stock can move unexpectedly but also shows the dangers of shorting a stock.
Conclusion-
Shorting stocks is an interesting option in the market and like any other options has its benefits and dangers. If you know how to short stocks and have a keen eye for the market as well as a bit of luck, you could potentially make some profit using this tool. In future posts I will also go over some other ways that investors could potentially incorporate shorting stocks into their portfolios.
Intriguing Investing 