There is no market crisis by short selling and buying stocks??

Question

If the market goes down (like now) you can make profits by short selling, and if the market is going up you can just buy the stocks and make profits as well.

Is that correct?

Answer 1

In principal, yes. That is why many of the "market neutral" funds have a long / short strategy because you can make money by shorting even if the market declines. However, the timing of these strategies is difficult and requires extensive analysis of the technicals and fundamentals of the underlying stocks and the broader market and economy.

Shorting is very risky, because if you buy a stock long, you can lose only 100% of your investment if the stock goes to zero. When you short a stock and it rises, your losses are infinite (no cap to your losses).

Answer 2

9/11 and similar crisis have nothing to do with short selling. Astute investors who have a good risk tolerance short sell stocks to make money when a stock or the entire market is moving downwards. Here is how it works: You believe that company ABC which is currently trading at $100 is over-valued, or you have some reason to believe that the stock price will come down in the near future. You sell the stock, without actually owning it. You tell your broker that you want to short 100 shares of ABC. Your broker borrows 100 shares from another client and sells them for $100. The $10,000 in proceeds (less fees) is deposited in your account. You now owe 100 shares of ABC stock to your broker. If the stock goes down to $80, and you decide it is time to cover your short position, you tell your broker that you want to cover your short. The broker buys back the 100 shares for $8000 (plus fees) and returns the stock to the person that it was borrowed from. You have just made approximately $2000 from a stock that you don't own that lost money. There is a downside however. If you are wrong, and the stock goes up, you lose money. If it goes to $120, you now owe 100 shares of stock at $120 per share or $12,000. The broker may ask you to cover your position, and you may have to sell other stocks to cover the additional $2000. The stock can only go down to zero, so you are limited to a $10,000 profit. The stock can theoretically go up indefinately, so your losses are not. As far as people or organizations selling short before 9/11 that is likely an urban legend from conspiracy theory mongers. It is likely that a lot of people sold short prior to 9/11 as the tech bubble was still deflating.

Answer 3

Wrong.

When you short sell, you are betting that the market will go down.

Say that you short ABC stock at $10. This means that you borrow the stock and sell it at $10. At some time in the future, you have to return the stock that you borrowed.

If the price goes down to $5, you can buy at that price and return the borrowed stock, giving you a $5 per share gain.

If the price goes up to $15, you have to buy at that price giving you a net loss of $5 per share.

The big problem is that you have an unlimited potential for loss.

Answer 4

You are wrong, but for a subtle reason.

You do not make money by watching the market fall and then short selling, nor by watching the market rise and then buy.

To make an economic return, you have to short before the market falls and buy before the market climbs. It is rare to find anyone who makes money this way, that cannot be attributed to chance factors.

So the broad idea is correct, but if you are asking this question you lack the skills to make money from it. Instead, pick up a copy of "The Intelligent Investor," by Benjamin Graham. Read it thoroulghly and then pick up a copy of "Security Analysis," by Cottle or an old one by Graham. You will make a mint if you do and you will stop worrying about market prices too.

Answer 5

For the most part but it is easier said then done. If you sell short and don't cover you can get hurt. By the same token you can watch your stock go up and greed sets in and then before you know it your losing money. You should protect yourself with stop loss or by options (calls or puts) for insurance.

Answer 6

there are a lot of people who make money this way but there are as many who lose. The smarter/more experienced/more knowledgeable traders are more likley to win than the rest.