Short Selling Definition: What Is Shorting Stocks? - Investopedia

In short selling, a position is opened by borrowing shares of a stock or other asset that the investor believes will decrease in value. The investor then sells ... TableofContents Expand TableofContents WhatIsShortSelling? UnderstandingShortSelling WhySellShort? ProsandConsofShortSelling AdditionalConsiderationswithShortSelling CostsofShortSelling ShortSellingMetrics IdealConditionsforShortSelling ShortSelling'sReputation Real-WorldExampleofShortSelling WhyIsitCalledSellingShort? WhyDoShortSellersHavetoBorrowShares? IsShortSellingBad? CanISellShortinMyBrokerageAccount? WhatIsaShortSqueeze? Trading TradingSkills Partof DayTradingIntroduction PartOf DayTradingIntroduction ExploreTheGuide Overview DayTradingBasics Overview DayTraderDefinition DayTradingRateofReturn DayTradingInstruments Overview StockDefinition OptionsTrading Forex(FX)Trading TradingPlatforms,Tools,Brokers Overview BestDayTradingPlatforms TradingPlatformDefinition ChoosingDayTradingSoftware ChoosinganOnlineBroker PaperDayTrading TradingOrderTypes Overview MarketOrderDefinition LimitOrderDefinition StopOrderDefinition Strategy&Analysis Overview BeginnerDayTradingStrategies ChoosingStocksforDayTrading 10RulesForSuccessfulTrading ShortSelling Risk&MoneyManagement Overview GuidetoDayTradingonMargin MarketRisk RiskManagementTechniques Risk/RewardRatioDefinition DayTradingPsychology Overview TradingPsychologyDefinition ImportanceofTradingPsychology WhatIsShortSelling? Shortsellingisaninvestmentortradingstrategythatspeculatesonthedeclineinastockorothersecurity'sprice.Itisanadvancedstrategythatshouldonlybeundertakenbyexperiencedtradersandinvestors. Tradersmayuseshortsellingasspeculation,andinvestorsorportfoliomanagersmayuseitasahedgeagainstthedownsideriskofalongpositioninthesamesecurityorarelatedone.Speculationcarriesthepossibilityofsubstantialriskandisanadvancedtradingmethod.Hedgingisamorecommontransactioninvolvingplacinganoffsettingpositiontoreduceriskexposure. Inshortselling,apositionisopenedbyborrowingsharesofastockorotherassetthattheinvestorbelieveswilldecreaseinvalue.Theinvestorthensellstheseborrowedsharestobuyerswillingtopaythemarketprice.Beforetheborrowedsharesmustbereturned,thetraderisbettingthatthepricewillcontinuetodeclineandtheycanpurchasethematalowercost.Theriskoflossonashortsaleistheoreticallyunlimitedsincethepriceofanyassetcanclimbtoinfinity. KeyTakeaways Shortsellingoccurswhenaninvestorborrowsasecurityandsellsitontheopenmarket,planningtobuyitbacklaterforlessmoney.Short-sellersbeton,andprofitfrom,adropinasecurity'sprice.Thiscanbecontrastedwithlonginvestorswhowantthepricetogoup.Shortsellinghasahighrisk/rewardratio:Itcanofferbigprofits,butlossescanmountquicklyandinfinitelyduetomargincalls. 1:34 ShortSelling UnderstandingShortSelling Withshortselling,aselleropensashortpositionbyborrowingshares,usuallyfromabroker-dealer,hopingtobuythembackforaprofitifthepricedeclines.Sharesmustbeborrowedbecauseyoucannotsellsharesthatdonotexist.Tocloseashortposition,atraderbuysthesharesbackonthemarket—hopefullyatapricelessthanwhattheyborrowedtheasset—andreturnsthemtothelenderorbroker.Tradersmustaccountforanyinterestchargedbythebrokerorcommissionschargedontrades. Toopenashortposition,atradermusthaveamarginaccountandwillusuallyhavetopayinterestonthevalueoftheborrowedshareswhilethepositionisopen.Also,theFinancialIndustryRegulatoryAuthority,Inc.(FINRA),whichenforcestherulesandregulationsgoverningregisteredbrokersand broker-dealer firmsintheUnitedStates,theNewYorkStockExchange(NYSE),andtheFederalReservehavesetminimumvaluesfortheamountthatthemarginaccountmustmaintain—knownasthemaintenancemargin.Ifaninvestor'saccountvaluefallsbelowthemaintenancemargin,morefundsarerequired,orthepositionmightbesoldbythebroker. Theprocessoflocatingsharesthatcanbeborrowedandreturningthemattheendofthetradeishandledbehindthescenesbythebroker.Openingandclosingthetradecanbemadethroughtheregulartradingplatformswithmostbrokers.However,eachbrokerwillhavequalificationsthetradingaccountmustmeetbeforetheyallowmargintrading. WhySellShort? Themostcommonreasonsforengaginginshortsellingarespeculationandhedging.Aspeculatorismakingapurepricebetthatitwilldeclineinthefuture.Iftheyarewrong,theywillhavetobuythesharesbackhigher,ataloss.Becauseoftheadditionalrisksinshortsellingduetotheuseofmargin,itisusuallyconductedoverasmallertimehorizonandisthusmorelikelytobeanactivityconductedforspeculation. Peoplemayalsosellshortinordertohedgealongposition.Forinstance,ifyouowncalloptions(whicharelongpositions)youmaywanttosellshortagainstthatpositiontolockinprofits.Or,ifyouwanttolimitdownsidelosseswithoutactuallyexitingalongstockpositionyoucansellshortinastockthatiscloselyrelatedorhighlycorrelatedwithit. ExampleofShortSellingforaProfit ImagineatraderwhobelievesthatXYZstock—currentlytradingat$50—willdeclineinpriceinthenextthreemonths.Theyborrow100sharesandsellthemtoanotherinvestor.Thetraderisnow“short”100sharessincetheysoldsomethingthattheydidnotownbuthadborrowed.Theshortsalewasonlymadepossiblebyborrowingtheshares,whichmaynotalwaysbeavailableifthestockisalreadyheavilyshortedbyothertraders. Aweeklater,thecompanywhoseshareswereshortedreportsdismalfinancialresultsforthequarter,andthestockfallsto$40.Thetraderdecidestoclosetheshortpositionandbuys100sharesfor$40ontheopenmarkettoreplacetheborrowedshares.Thetrader’sprofitontheshortsale,excludingcommissionsandinterestonthemarginaccount,is$1,000:($50-$40=$10x100shares=$1,000). ExampleofShortSellingforaLoss Usingthescenarioabove,let'snowsupposethetraderdidnotcloseouttheshortpositionat$40butdecidedtoleaveitopentocapitalizeonafurtherpricedecline.However,acompetitorswoopsintoacquirethecompanywithatakeoverofferof$65pershare,andthestocksoars.Ifthetraderdecidestoclosetheshortpositionat$65,thelossontheshortsalewouldbe$1,500:($50-$65=negative$15x100shares=$1,500loss).Here,thetraderhadtobuybackthesharesatasignificantlyhigherpricetocovertheirposition. ExampleofShortSellingasaHedge Apartfromspeculation,shortsellinghasanotherusefulpurpose—hedging—oftenperceivedasthelower-riskandmorerespectableavatarofshorting.Theprimaryobjectiveofhedgingisprotection,asopposedtothepureprofitmotivationofspeculation.Hedgingisundertakentoprotectgainsormitigatelossesinaportfolio,butsinceitcomesatasignificantcost,thevastmajorityofretailinvestorsdonotconsideritduringnormaltimes. Thecostsofhedgingaretwofold.There’stheactualcostofputtingonthehedge,suchastheexpensesassociatedwithshortsales,orthepremiumspaidforprotectiveoptionscontracts.Also,there’stheopportunitycostofcappingtheportfolio’supsideifmarketscontinuetomovehigher.Asasimpleexample,if50%ofaportfoliothathasaclosecorrelationwiththeS&P500index(S&P500)ishedged,andtheindexmovesup15%overthenext12months,theportfoliowouldonlyrecordapproximatelyhalfofthatgainor7.5%. ProsandConsofShortSelling Sellingshortcanbecostlyifthesellerguesseswrongaboutthepricemovement.Atraderwhohasboughtstockcanonlylose100%oftheiroutlayifthestockmovestozero. However,atraderwhohasshortedstockcanlosemuchmorethan100%oftheiroriginalinvestment.Theriskcomesbecausethereisnoceilingforastock’sprice,itcanrise"toinfinityandbeyond"—tocoinaphrasefromanothercomiccharacter,BuzzLightyear.Also,whilethestockswereheld,thetraderhadtofundthemarginaccount.Evenifallgoeswell,tradershavetofigureinthecostofthemargininterestwhencalculatingtheirprofits. Pros Possibilityofhighprofits Littleinitialcapitalrequired Leveragedinvestmentspossible Hedgeagainstotherholdings Cons Potentiallyunlimitedlosses Marginaccountnecessary Margininterestincurred Shortsqueezes Whenitcomestimetocloseaposition,ashort-sellermighthavetroublefindingenoughsharestobuy—ifalotofothertradersarealsoshortingthestockorifthestockisthinlytraded.Conversely,sellerscangetcaughtinashortsqueezeloopifthemarket,oraparticularstock,startstoskyrocket. Ontheotherhand,strategiesthatofferhighriskalsoofferahigh-yieldreward.Shortsellingisnoexception.Ifthesellerpredictsthepricemovescorrectly,theycanmakeatidyreturnoninvestment(ROI),primarilyiftheyusemargintoinitiatethetrade.Usingmarginprovidesleverage,whichmeansthetraderdidnotneedtoputupmuchoftheircapitalasaninitialinvestment.Ifdonecarefully,shortsellingcanbeaninexpensivewaytohedge,providingacounterbalancetootherportfolioholdings. Beginninginvestorsshouldgenerallyavoidshortsellinguntiltheygetmoretradingexperienceundertheirbelts.Thatbeingsaid,shortsellingthroughETFsisasomewhatsaferstrategyduetothelowerriskofa shortsqueeze. AdditionalConsiderationswithShortSelling Besidesthepreviously-mentionedriskoflosingmoneyonatradefromastock'spricerising,shortsellinghasadditionalrisksthatinvestorsshouldconsider. ShortingUsesBorrowedMoney Shortingisknownas margintrading. Whenshortselling,youopenamarginaccount,whichallowsyoutoborrowmoneyfromthebrokeragefirmusingyourinvestmentascollateral. Justaswhenyougolongonmargin,it'seasyforlossestogetoutofhandbecauseyoumustmeettheminimum maintenancerequirementof25%.Ifyouraccountslipsbelowthis,you'llbesubjecttoa margincallandforcedtoputinmorecashorliquidateyourposition. WrongTiming Eventhoughacompanyisovervalued,itcouldconceivablytakeawhileforitsstockpricetodecline.Inthemeantime,youarevulnerabletointerest,margincalls,andbeingcalledaway. TheShortSqueeze Ifastockisactivelyshortedwithahighshortfloatanddaystocoverratio,itisalsoatriskofexperiencingashortsqueeze.Ashortsqueezehappenswhenastockbeginstorise,andshort-sellerscovertheirtradesbybuyingtheirshortpositionsback.Thisbuyingcanturnintoafeedbackloop.Demandforthesharesattractsmorebuyers,whichpushesthestockhigher,causingevenmoreshort-sellerstobuybackorcovertheirpositions. RegulatoryRisks Regulatorsmaysometimesimposebansonshortsalesinaspecificsector,oreveninthebroadmarket,toavoidpanicandunwarrantedsellingpressure.Suchactionscancauseasuddenspikeinstockprices,forcingtheshortsellertocovershortpositionsathugelosses. GoingAgainsttheTrend Historyhasshownthat,ingeneral,stockshaveanupwarddrift.Overthelongrun,moststocksappreciateinprice.Forthatmatter,evenifacompanybarelyimprovesovertheyears,inflationortherateofpriceincreaseintheeconomyshoulddriveitsstockpriceupsomewhat.Whatthismeansisthatshortingisbettingagainsttheoveralldirectionofthemarket. CostsofShortSelling Unlikebuyingandholdingstocksorinvestments,shortsellinginvolvessignificantcosts,inadditiontotheusualtradingcommissionsthathavetobepaidtobrokers.Someofthecostsinclude:  MarginInterest  Margininterestcanbeasignificantexpensewhentradingstocksonmargin.Sinceshortsalescanonlybemadeviamarginaccounts,theinterestpayableonshorttradescanaddupovertime,especiallyifshortpositionsarekeptopenoveranextendedperiod. StockBorrowingCosts Sharesthataredifficulttoborrow—becauseofhighshortinterest,limitedfloat,oranyotherreason—have“hard-to-borrow”feesthatcanbequitesubstantial.Thefeeisbasedonanannualizedratethatcanrangefromasmallfractionofapercenttomorethan100%ofthevalueoftheshorttradeandispro-ratedforthenumberofdaysthattheshorttradeisopen. Asthehard-to-borrowratecanfluctuatesubstantiallyfromdaytodayandevenonanintra-daybasis,theexactdollaramountofthefeemaynotbeknowninadvance.Thefeeisusuallyassessedbythebroker-dealertotheclient’saccounteitheratmonth-endoruponclosingoftheshorttrade,andifitisquitelarge,canmakeabigdentintheprofitabilityofashorttradeorexacerbatelossesonit. DividendsandotherPayments Theshortsellerisresponsibleformakingdividendpaymentsontheshortedstocktotheentityfromwhomthestockhasbeenborrowed.Theshortsellerisalsoonthehookformakingpaymentsonaccountofothereventsassociatedwiththeshortedstock,suchassharesplits,spin-offs,andbonusshareissues,allofwhichareunpredictableevents. ShortSellingMetrics Twometricsusedtotrackshort-sellingactivityonastockare: Shortinterestratio(SIR)—alsoknownastheshortfloat—measurestheratioofsharesthatarecurrentlyshortedcomparedtothenumberofsharesavailableor“floating”inthemarket.AveryhighSIRisassociatedwithstocksthatarefallingorstocksthatappeartobeovervalued. Theshortinteresttovolumeratio—alsoknownasthedaystocoverratio—thetotalsharesheldshortdividedbytheaveragedailytradingvolumeofthestock.Ahighvalueforthedaystocoverratioisalsoabearishindicationforastock. Bothshort-sellingmetricshelpinvestorsunderstandwhethertheoverallsentimentisbullishorbearishforastock. Forexample,afteroilpricesdeclinedin2014,GeneralElectricCo.’s(GE)energydivisionsbegantodragontheperformanceoftheentirecompany.Theshortinterestratiojumpedfromlessthan1%tomorethan3.5%inlate2015asshort-sellersbegananticipatingadeclineinthestock.Bythemiddleof2016,GE’ssharepricehadtoppedoutat$33pershareandbegantodecline.ByFebruary2019,GEhadfallento$10pershare,whichwouldhaveresultedinaprofitof$23persharetoanyshortsellersluckyenoughtoshortthestocknear thetopinJuly2016. IdealConditionsforShortSelling Timingiscrucialwhenitcomestoshortselling.Stockstypicallydeclinemuchfasterthantheyadvance,andasizeablegaininastockmaybewipedoutinamatterofdaysorweeksonanearningsmissorotherbearishdevelopment.Theshortsellerthushastotimetheshorttradetonearperfection.Enteringthetradetoolatemayresultinahugeopportunitycostintermsoflostprofits,sinceamajorpartofthestock’sdeclinemayalreadyhaveoccurred. Ontheotherhand,enteringthetradetooearlymaymakeitdifficulttoholdontotheshortpositioninlightofthecostsinvolvedandpotentiallosses,whichwouldskyrocketifthestockincreasesrapidly.  Therearetimeswhentheoddsofsuccessfulshortingimprove,suchasthefollowing: DuringaBearMarket Thedominanttrendforastockmarketorsectorisdownduringabearmarket.Sotraderswhobelievethat“thetrendisyourfriend”haveabetterchanceofmakingprofitableshortsaletradesduringanentrenchedbearmarketthantheywouldduringastrongbullphase.Shortsellersrevelinenvironmentswherethemarketdeclineisswift,broad,anddeep—liketheglobalbearmarketof2008-09—becausetheystandtomakewindfallprofitsduringsuchtimes. WhenStockorMarketFundamentalsareDeteriorating Astock’sfundamentalscandeteriorateforanynumberofreasons—slowingrevenueorprofitgrowth,increasingchallengestothebusiness,risinginputcoststhatareputtingpressureonmargins,andsoon.Forthebroadmarket,worseningfundamentalscouldmeanaseriesofweakerdatathatindicateapossibleeconomicslowdown,adversegeopoliticaldevelopmentslikethethreatofwar,orbearishtechnicalsignalslikereachingnewhighsondecreasingvolume,deterioratingmarketbreadth. Experiencedshort-sellersmayprefertowaituntilthebearishtrendisconfirmedbeforeputtingonshorttrades,ratherthandoingsoinanticipationofadownwardmove.Thisisbecauseoftheriskthatastockormarketmaytrendhigherforweeksormonthsinthefaceofdeterioratingfundamentals,asistypicallythecaseinthefinalstagesofabullmarket. TechnicalIndicatorsConfirmtheBearishTrend Shortsalesmayalsohaveahigherprobabilityofsuccesswhenthebearishtrendisconfirmedbymultipletechnicalindicators.Theseindicatorscouldincludeabreakdownbelowakeylong-termsupportlevelorabearishmovingaveragecrossoverlikethe“deathcross.”Anexampleofabearishmovingaveragecrossoveroccurswhenastock's50-daymovingaveragefallsbelowits200-daymovingaverage.Amovingaverageismerelytheaverageofastock'spriceoverasetperiodoftime.Ifthecurrentpricebreakstheaverage,eitherdownorup,itcansignalanewtrendinprice. ValuationsReachElevatedLevelsAmidRampantOptimism Occasionally,valuationsforcertainsectorsorthemarketasawholemayreachhighlyelevatedlevelsamidrampantoptimismforthelong-termprospectsofsuchsectorsorthebroadeconomy.Marketprofessionalscallthisphaseoftheinvestmentcycle“pricedforperfection,”sinceinvestorswillinvariablybedisappointedatsomepointwhentheirloftyexpectationsarenotmet.Ratherthanrushinginontheshortside,experiencedshort-sellersmaywaituntilthemarketorsectorrollsoverandcommencesitsdownwardphase. JohnMaynardKeyneswasaninfluentialBritisheconomistwherebyhiseconomictheoriesarestillinusetoday.However,Keyneswasquotedsaying:“Themarketcanstayirrationallongerthanyoucanstaysolvent,”whichisparticularlyaptforshortselling.Theoptimaltimeforshortsellingiswhenthereisaconfluenceoftheabovefactors. ShortSelling'sReputation Sometimesshortsellingiscriticized,andshort-sellersareviewedasruthlessoperatorsouttodestroycompanies.However,therealityisthatshortsellingprovidesliquidity,meaningenoughsellersandbuyers,tomarketsandcanhelppreventbadstocksfromrisingonhypeandover-optimism.Evidenceofthisbenefitcanbeseeninassetbubblesthatdisruptthemarket.Assetsthatleadtobubblessuchasthemortgage-backedsecuritymarketbeforethe2008financialcrisisarefrequentlydifficultornearlyimpossibletoshort. Shortsellingactivityisalegitimatesourceofinformationaboutmarketsentimentanddemandforastock.Withoutthisinformation,investorsmaybecaughtoff-guardbynegativefundamentaltrendsorsurprisingnews. Unfortunately,shortsellinggetsabadnameduetothepracticesemployedbyunethicalspeculators.Theseunscrupuloustypeshaveusedshort-sellingstrategiesandderivativestoartificiallydeflatepricesandconduct“bearraids”onvulnerablestocks.MostformsofmarketmanipulationlikethisareillegalintheU.S.,butitstillhappensperiodically. Putoptionsprovideagreatalternativetoshortsellingbyenablingyoutoprofitfromadropinastock'spricewithouttheneedformarginorleverage.Ifyou'renewtooptionstrading,Investopedia's OptionsforBeginnersCourseprovidesacomprehensiveintroductiontotheworldofoptions.Itsfivehoursofon-demandvideo,exercises,andinteractivecontentofferrealstrategiestoincreaseconsistencyofreturnsandimprovetheoddsintheinvestor'sfavor. Real-WorldExampleofShortSelling Unexpectednewseventscaninitiateashortsqueezewhichmayforceshortsellerstobuyatanypricetocovertheirmarginrequirements.Forexample,inOctober2008,Volkswagenbrieflybecamethemostvaluablepubliclytradedcompanyintheworldduringanepicshortsqueeze. In2008,investorsknewthatPorschewastryingtobuildapositioninVolkswagenandgainmajoritycontrol.ShortsellersexpectedthatoncePorschehadachievedcontroloverthecompany,thestockwouldlikelyfallinvalue,sotheyheavilyshortedthestock.However,inasurpriseannouncement,Porscherevealedthattheyhadsecretlyacquiredmorethan70%ofthecompanyusingderivatives,whichtriggeredamassivefeedbackloopofshort-sellersbuyingsharestoclosetheirposition. Shortsellerswereatadisadvantagebecause20%ofVolkswagenwasownedbyagovernmententitythatwasn’tinterestedinselling,andPorschecontrolledanother70%,sotherewereveryfewsharesavailableonthemarket—float—tobuyback.Essentially,boththeshortinterestanddaystocoverratiohadexplodedhigherovernight,whichcausedthestocktojumpfromthelow€200stoover€1,000. Acharacteristicofashortsqueezeisthattheytendtofadequickly,andwithinseveralmonths,Volkswagen’sstockhaddeclinedbackintoitsnormalrange. WhyIsitCalledSellingShort? Ashortpositionisonethatbetsagainstthemarket,profitingwhenpricesdecline.Tosellshortistotakesuchabet.Thisisopposedtoalongposition,whichinvolvesbuyinganassetinhopesthepricewillrise. WhyDoShortSellersHavetoBorrowShares? Youcannotsellsomethingthatdoesn'texist,Sinceacompanyhasalimitednumberofsharesoutstanding,ashortsellermustfirstlocatesomeofthosesharesinordertosellthem.Theshortseller,therefore,borrowsthosesharesfromanexistinglongandpaysinteresttothelender.Thisprocessisoftenfacilitatedbehindthescenesbyone'sbroker.Iftherearenotmanysharesavailableforshorting(i.e.,hardtoborrow),thentheinterestcoststosellshortwillbehigher. IsShortSellingBad? Whilesomepeoplethinkitisunethicaltobetagainstthemarket,mosteconomistsandfinancialprofessionalsagreethatshortsellersprovideliquidityandpricediscoverytoamarket,makingitmoreefficient. CanISellShortinMyBrokerageAccount? Manybrokersallowshortsellinginindividualaccounts,butyoumustfirstapplyforamarginaccount. WhatIsaShortSqueeze? Becauseshortsalesaresoldonmargin,relativelysmalllossescanleadtoeverlargermargincalls.Ifamargincallcannotbemet,theshortmustbuybacktheirsharesateverhigherprices.Thisworkstobidthepriceofthestockevenhigher. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. FINRA."MarginRegulation."AccessedDec.30,2021. GeneralElectric."GEStock."AccessedDec.30,2021. Reuters."ShortSellersMakeVWtheWorld'sPriciestFirm."AccessedDec.30,2021. PorscheSE."PorscheHeadsforDominationAgreement."AccessedDec.30,2021. TheNewYorkTimes."PorscheReinventstheShortSqueeze."AccessedDec.30,2021. 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Provider Name Description PartOf DayTradingIntroductionGuide AnIntroductiontoDayTrading 1of24 DayTraderDefinition 2of24 HowMuchCanYouMakeasaDayTrader 3of24 WhatIsaStock? 4of24 GettingAcquaintedWithOptionsTrading 5of24 WhatIsForex(FX)andHowDoesItWork? 6of24 BestOnlineBrokersforDayTrading 7of24 TradingPlatformDefinition 8of24 ChoosingtheRightDay-TradingSoftware 9of24 HowtoChooseanOnlineStockBroker 10of24 UsingPaperTradingtoPracticeDayTrading 11of24 HowaMarketOrderWorks 12of24 LimitOrderDefinition 13of24 StopOrderDefinition 14of24 10DayTradingStrategiesforBeginners 15of24 HowtoChooseStocksforDayTrading 16of24 Top10RulesForSuccessfulTrading 17of24 ShortSelling 18of24 AGuidetoDayTradingonMargin 19of24 WhatIsMarketRisk? 20of24 RiskManagementTechniquesforActiveTraders 21of24 InsidetheRisk/RewardRatio 22of24 TradingPsychologyDefinition 23of24 TradingPsychology:WhytheMindMattersinMakingMoney 24of24 RelatedTerms ShortSqueeze Ashortsqueezeoccurswhenastockmovessharplyhigher,promptingtraderswhobetitspricewouldfalltobuyitinordertoavoidgreaterlosses. more WhatIsaRebateinaShort-SaleTransaction? Arebateinashort-saletransactionistheportionofinterestordividendspaidbytheshortsellertotheownerofthesharesbeingsoldshort. more WhatIsaBearTrapintheStockMarket? Abeartrapdenotesadeclinethatinducesmarketparticipantstoopenshortsalesaheadofareversalthatsqueezesthosepositionsintolosses. more WhatIsaSellout? Aselloutisasituationinfinanceinwhichinvestorsareforcedtoselltheirassets.Acommonexampleofaselloutisamargincall. more PutOption:HowItWorksandExamples Aputoptiongrantstherighttotheownertosellsomeamountoftheunderlyingsecurityataspecifiedprice,onorbeforetheoptionexpires. more ShortCoveringDefinition Shortcoveringisastrategywheresomebodywhohassoldanassetshortbuysitbacktoclosetheposition. more PartnerLinks RelatedArticles Investopedia HowanInvestorCanMakeMoneyShortSellingStocks Investopedia WhatShortInterestTellsUs Investopedia HowIsaPutOptionExercised? Investopedia ShortSelling,orSellingSomethingYouDon'tOwn Investopedia TheTruthAboutNakedShortSelling Investopedia PricesPlunging?BuyaPut!