Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
can hold on to them for as long as you wish. At this point you are long 20 shares of Ford. Suppose that after one year Ford stock moves up to $100 per share. You now have doubled your money. But not so fast. You actually are still long 20 shares of Ford. As long as you hold on to your shares, all you have is the 20 shares. Their value have doubled in price but you still have 20 shares. This is an important concept in the world of investing. You have no profit or loss until you actually settle your position.
Now if you do decide to settle your position, you can go ahead and sell your 20 shares at $100. (You may of course sell 5 shares or 10 shares or whatever.) Once your sell order is executed and the money is deposited in your account, you have settled your long position and can really boast about doubling your money. Don't forget that the tax man would join in on your celebration to take a piece of your profits (capital gains taxes). At the other end of the scale is the condition when your shares have lost value. As long as you don't sell your position, you have no losses. But once you decide to close out your position (let's say at $25 per share), then you can start grieving over losing half of your original money (capital losses). So much for buying and selling.
So what is this shorting transaction? When you short a stock, you are in effect borrowing a certain number of shares and selling them on the spot. Don't worry about where the borrowed shares are coming from. (They usually come from a pool of unregistered shares set aside by brokers for shorting.) The reason you would short a stock is that you believe that the stock will lose value over time and your are hoping to profit from this. This is almost the exact opposite of buying stocks with one dangerous pitfall that I'll explain in a bit. But let's take a look at an example first. You believe that Ford stock, which is going for $50 per share, will decrease in price in a while. So you place an order to short 20 shares of Ford at $50 per share. That will put an immediate $1,000 in …
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