Hey, what's going on i'm matt and in this video i will be discussing shorting a stock if you've ever had a hunch that stocks will be going down, maybe say because of a global illness, a housing market crash or any other random thing you can imagine shorting Allows you to profit off the decline on the surface level. Understanding the purpose of a short position is as simple as knowing that you make money when a stock drops, but as with many things in the stock market, shorting is a bit more complex than it. First seems so before you dive head first into becoming a stock market. Bear, let's cover a few details.

I wish i knew so you're better prepared to start. You should understand how shorting works behind the scenes. In this example, let's say that there are two people teddy and leo leo, owns the stock and teddy thinks that that stock will be going down and wants to make some money off of it. Teddy would borrow the stock from leo and sell it right away.

Then, after some time has passed, teddy would be required to return the stock to leo if he is able to buy it from the market at a cheaper price when returning it to leo, he would profit the difference if he can only buy it for a more Expensive price relative to when he sold it, he would lose the difference in the end, our boy leo would get the stock back and teddy would either profit or lose the difference from when he's buying it back in reality, all you have to do to take a Short position is hit the like button, i'm kidding to short, you need to sell a stock from your trading account and then buy it back when you want to take profits or if your max risk has been hit. You should know how the process works behind the scenes, because it leads to other aspects. You definitely need to be aware of. First to be able to short a stock, you have to have a margin account.

A margin account is a type of brokerage account where the broker lends you funds. This type of account is needed, because the risk of a short position is technically unlimited, see when you own a stock. It can only go to zero in the worst case scenario, but if you short a stock, it can move against you upward, theoretically to infinity because of this risk to both you and your broker, there's a minimum value. Your account must maintain.

This is known as the maintenance margin level if your positions move against you and your account value drops below this level, you're going to need to deposit more funds into your account. If you don't, you could be margin called, which is when your broker sells your positions in order to mitigate risk. To avoid this headache completely you're going to need to pay close attention to your margin requirements. Now, let's say you have a margin account and more than enough funds to cover the margin requirements.

You should know that not all stocks can be shorted. Trust me it's an absolutely brutal feeling to watch a stock drop after you tried to short it, but weren't allowed to the reason for this is because shares aren't always available to be borrowed. Remember in my example, how teddy had borrowed stock from leo? If leo, had already lent his stock to tom, then there would be no stock for teddy to short, see when a stock is wildly unpopular, it is heavily shorted, which means all the available shares. Too short.

Might already be taken, this would make it impossible for your broker to locate shares for you to short, as in your broker, might not be able to find you your leo to make things worse, even if you're lucky enough to find your leo, it's not free. Most brokerages charge borrowing fees. These fees can range anywhere from reasonable to very expensive. If the shares you want are in high demand, as you can imagine, this means you need to be very confident.

The stock will go down in order to make it a worthwhile short. Even though it doesn't relate to the mechanics of shorting, i want you to be aware of short squeezes. A short squeeze can occur when a stock is heavily shorted. If the bears are wrong, as in the stock starts to drift upward, they may choose to cut their losses.

This pushes the stock up even more. Thus, a feedback loop is created and it puts even more pressure on the other bears and when there's blood in the water sharks attack, the high demand will continue to push the price up. If you have a short position and are slow to react, the losses can quickly get out of hand. This is just another reason why you should be using a stop loss.

I cannot stress this enough, but when trading you always need to protect yourself. I hope you enjoyed learning about shorting stocks and what it truly takes to be a market bear if you enjoy this type of content subscribe for more, i put out new videos every week, thanks for watching until the end and best of luck with making money. When stocks drop today.