I have a question about short trading in the stock market?
（I read that there was a new policy that didn’t let you do any short trading in the stock market if you have any sort of stocks in banking companies. I bought 900 shares of e-trade stock on September 17th and this new rule applied September 19th through October 2nd. Since I bought my stock before the rule applied, am I allowed to sell?）
Answer ：
Short sellling has nothing to do with selling a stock you already own. Short selling is selling a stock you don’t own hoping the stock will go down. In a manner of speaking, you’re sort of borrowing the stock (at least on paper) and if the stock goes down, you can buy it in the open market at the reduced price and you’ve earned the difference in the price. Example, you short a stock at 10 but you have a few days to provide the stock to the buyer. During this settlement period, you have to come up with the stock. If it goes down (as you hope) to let’s say $8, you buy the stock in the open market at $8 and deliver it to your original buyer and realize the $2 per share price differential. The big risk of shorting is if the stock goes up. If it goes $12 in the previous example, and you sold it for $10, you’ve got to go into the market and purchase it at $12 to cover your borrowed position and you’ll lose $2 per share (or more).
If you already own the stock, you can always sell it and your profit or loss is the difference between your sale and purchase prices. Hope that helps.
Posted: July 29th, 2010 under US Stock Market.
Tags: Stock market