SHORT SELLING STOCKS FOR DUMMIES

The SEC today (September 19, 2008),banned the short selling of stock of 799 financial companies through October 2. I think they will extend the band much longer than that perhaps until after the election in an effort to make sure the market is given the best chance of being stable.

What is stock market short selling? How do you short sell a stock? Shorting a stock is the opposite of buying the stock. When you decide to short a stock you do it because you think the stock price of that stock is going to go down. What happens is this: a stock market investor who sells a stock short borrows shares from a brokerage house in order to sell those shared to another investor. Proceeds from the sale go into the shorter's account but he must buy those shares back at some point in time and return them to the lender. When you buy the shares back it is called "covering".

Short selling stocks is not a strategy stock market for beginners should use. Only investors who know what they are doing should ever attempt this because you can theoretically lose more than when you just buy a stock. When you invest in a stock, the most you can lose is what you have invested and the stock would have to go to zero for that to happen. However, when you short selling a stock, the stock could go up and up and never stop. The more it goes up the more you lose so there is no limit to how much you could lose when you short a stock.