Stock Investing 101

Buying stock is pretty easy for even the novice investor to understand. You are simply owning a very small part of a company.

Shorting stock is harder to understand, and I definitely do not recommend shorting stocks if you are a novice investor.

Shorting a stock is basically taking a loan out against the stock.

If company XYZ is trading at 50 dollars a share you can short 20 shares and you will be given whatever the price of the shares you shorted, in this case one thousand dollars. However you will “owe” 20 shares. You can repay these shares at any time similarly to the way that you can sell shares of stock that you own at any time.

I do not short stocks for many reasons, here are a few of them:

• You could lose endless amounts of money. When you buy shares of a company you can only lose however much you invest in the company. What happens when you short a stock and it ends up being the next microsoft? You will be wiped out in an instant.
• I cannot predict what will happen in the short term. This is why I do not buy and sell companies daily or weekly. I do not know if a company will be up or down tomorrow but I can get a pretty solid inkling of how a company will do over years and decades.
• You are setting yourself up to lose if you short a stock long term. Stocks generally return 8-10% a year over time. By betting that the price of a stock will go down you are going up against history and the market, which is not a smart move.

The pro’s can get away with shorting stocks and making a solid return on their investment but I simply cannot. I encourage you to stick with buying shares of companies that are profitable and well run. Hold them for as long as you can and you will see a great return on your money over the long run with little work and little risk.