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| Should I short sell stocks? By The-Adviser.com - |
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New York - Aggressive investors can use selling short to profit when a stock
declines. When you sell stock short, you are actually borrowing shares from your broker,
selling them, and keeping the proceeds. You should only sell a stock short if you believe
that it will go down and that you can buy and return the shares to your broker at a lower
cost that what you originally shorted it. Here are two examples:
Example #2
Example #2 illustrates a profitable short sale while example #1 shows a loss. Both examples do not include the effects of brokerage commissions or any dividends that you would actually pay if you the company paid a dividend. Remember, you only borrowed the stock and you would owe the dividends to the rightful owner. Selling stock short has advantages. Just as you can find a stock that will go down - you may believe a stock is significantly overvalued; hence, this method allows you to profit on your belief. At year end, it is an excellent method to defer paying taxes on a stock that you want to sell but lock in built-up profits. For instance, if you short a stock in December and buy it back in January, you have effectively locked in your profit and would defer taxes until the following year. Keep in mind the following characteristics when considering selling short:
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