Short Selling Stocks

Does the economy have you down? Do you want to invest but don’t have the money? Are you looking for a way to successfully invest in the sinking market? Well, the investing practice of “short selling stocks” might be your answer.

Now, I preface this by stating that short selling stocks is considered somewhat of an advanced technique, so you might want to contact an advisor before jumping in headfirst. The reward can be great, but as always with investing, risk plays a huge role.

The principal idea behind short selling is contrary to mainstream investing, i.e., buy low, sell high. In almost bizarro-like fashion, you buy high and sell low. Sound strange? Good, it should. After researching a stock that you believe to be overvalued, you borrow shares you don’t own from your broker, order them sold, and take the money. Then, you enter the most critical stage of the process. Exciting to some, excruciating to others, this is the time you wait for the price of the stock to drop. If you are correct in your assumption and the price drops, say a quick prayer of thanks, buy the shares at the lower price, turn them over to your broker, and keep the profit.

To illustrate this further, lets say you could sell short 100 shares at $20 a share. Say the price drops to $15. You buy 100 shares at that price and return them to your broker, pocketing the $500 difference minus commissions. So, since you sold the shares for more than you originally paid, you came out on top and didn’t have to use any of your hard-earned cash. Yeah!

Sound simple? Well, it’s really not. Short selling stocks has some inherent problems. First, you have a limited profit potential. Since the stock price cannot drop below $0, you only have from the starting price down to gain. Also with this limitation, selecting low-priced stocks don’t offer much of a gain unless you buy a large number of shares. Second, and most importantly, the price of the shares could go up! Again, an increase of the stock’s price is the adverse of what you want to occur. In this disastrous situation, you’re obligated to replace the shares that you borrowed at a higher price than you paid for them.  Contrary to the recent stock market activity, it actually goes up more often than it goes down.

Another negative is the “squeeze”. This occurs when a heavily shorted stock starts to increase in value, as stated above. Short sellers begin to panic in an attempt to cover their positions. The price ultimately is driven up higher due to the heavy buying. In this situation, you are responsible for the difference as well. Ouch.

Don’t get discouraged, however. Short selling has been in practice for over 400 years and is a widely used investing technique. Short selling is also said to keep the market honest with the idea of balancing the market with investors who will do anything to have their stocks go up with investors who are driven to do the opposite.

There’s also version of short selling stocks called naked short selling, and no, it’s not short selling shares in the comfort of your own home at your computer.  It’s an illegal short sale that occurs before the seller has actually borrowed the stock. So it’s not only selling something you don’t own (short selling), it’s selling something that may not even exist. Don’t do this.

So, if you’re looking for a way to protect your assets and make some money in this downward spiral of an economy, try high-interest money markets. If you are an aggressive investor that has completed the appropriate research and is looking for an exciting way achieve profit in a bear market, short selling stocks might be for you. Pepcid is on aisle five.

Economy Makes for Mixed Market

Major indexes came off earlier lows Friday February 20th after the Dow reached a six-year low in the previous session. Big banks remained in the spotlight amid nationalization fears. U.S. stocks were mixed in early trading Friday amid market volatility as February options contracts expire. Major indexes came up from earlier lows following Thursday’s skid in the Dow Jones industrial average through its Nov. 20 bear market low to a six-year low. The Dow is off 47% in the 16-month slide.

Today the 30-stock Dow Jones industrial average was lower by 44.21 points, or 0.59%, at 7,421.74. The broad S&P 500 index fell 5.66 points, or 0.73%, to 773.28. The tech-heavy Nasdaq composite index was up 1.81 points, or 0.13%, to 1,444.63.

On the NYSE, 21 stocks were lower in price for every six that advanced. Nasdaq breadth was 14-8 negative. Trading was relatively active.

The financial sector remained in the spotlight Friday amid concerns that big banks may be nationalized. Bank of America (BAC) Chairman and Chief Executive Kenneth Lewis told Bank of America executives at a senior leadership meeting on Thursday that Washington policy officials have assured him that the possibility of nationalizing the largest U.S. bank by assets is not on the table, the newspaper said, citing a person at the meeting.

Separately, Lewis was subpoenaed last week by New York Attorney General Andrew Cuomo, who is investigating whether the bank violated state law by withholding information from investors, the Wall Street Journal said. Investigators took testimony all day Thursday from former Merrill Chief Executive John Thain, the newspaper said. Thain was asked about $4 billion in bonuses paid to Merrill employees, and in particular why Bank of America’s merger agreement with Merrill contained a nonpublic attachment outlining the maximum Merrill could pay, the newspaper said.

The troubled newspaper industry remained in the headlines. The New York Times Co. (NYT) said its board voted to suspend the quarterly dividend on the company’s Class A and Class B common stock. In November, 2008, the company reduced the payout level of its fourth quarter to $0.06 per share from $0.23 per share in the 2008 third quarter. Let’s further look at the analysis of the US Economy here below:

Shares of Chiquita Brands International (CQB) tumbled Friday after the company posted a $0.74 fourth-quarter non-GAAP loss per share vs. $0.02 EPS on flat sales, higher costs including flood impacts, a weaker euro, and lower performance in salads. The company expects to deliver improved full-year results in 2009.

In recent economic stock news, U.S. CPI rose 0.3%, with the core rate up 0.2% in January. That follows a revised 0.8% decline in December headline index (was -0.7%), and a flat reading on the core. Gains were widespread following several months of declines and should help unwind deflation fears. Energy prices rose 1.7%, rebounding from a 9.3% December decline. Gas prices rose 6.0% after a 19.3% drop in December. Food prices edged up 0.1%. In the housing sector, the owners’ equivalent rent measure rose 0.3%. Apparel prices rose 0.3%. Medical care costs are up 0.4%, and tobacco prices are up 0.8%. The data are close to expectations and should have little effect on the markets.

The euro headed lower vs. the U.S. dollar Friday as worries about trouble in Eastern Europe encouraged investors to flee to safer assets. Traders were nervous about damage to the European banking industry from struggling economies on the euro zone’s periphery and in Eastern Europe, says S&P.

Buy & Hold is a Losing Proposition

When it comes to investing in the stock market, especially during current times, investors should know when to hold on to stocks and know when to unload them.

Most financial experts believe that the buy-and-hold strategy of the traditional 401k methodology is a thing of the past if you want to gain the system. Buy and Hold which requires investors to buy stocks and then keep them for the long term has actually lost money over the last 10 years according to the S&P 500. The rational behind the “buy and hold” strategy is that, while the markets will likely experience ups and downs stemming from numerous factors, over time the stock markets tend to push upwards. Which means that those who use the buy-and-hold strategy stand to make money over time. This method has worked well for momentum traders that exit at the right times but leaves the rest of novice investors in the lurch.

While there are many experts who still hold to this Fortune 500 diversified strategy, others point to some of the more catastrophic stock market crashes of the past as proof that investors can literally lose everything they had gained in a bull market to the impact of the bear market. US economy of 2008 is proof positive.

Consider those who lost all their wealth during the stock market crash of 1929, which ushered in the infamous Great Depression. Many of the people who, back in the 1920s, held to the buy-and-hold strategy were the subject of riches-to-rags articles in newspapers worldwide. There is money to be made in today’s time, but timing and accuracy is more important than ever.

Experts say that bear markets materialize about every four or five years and bear markets can easily eliminate gains made in bull markets. History has proven this over and over. But for the ten year buy hold patterns we have beared witness to different results.

One researcher mentions that bear markets have hacked portfolio values an average of nearly 40 percent. This figure the buy-and-hold crowd would do well to consider and take notice.

Rather than adopt a buy-and-hold strategy, some financial professionals recommend that investors take a more sophisticated approach to buying and selling stocks. This necessitates monitoring market conditions and making changes as fluctuations in the markets warrant change. This is better known as trading the momentum and buying low and selling high. Ride the rips and sell the dips. This can be accomplished with the right data and the right market timing from Stocknod.com alerts.

Investors should also be wary of the advice they adhere to. While experts do provide a wealth of information on the markets and on individual stocks, it is up to investors to sift through the data and ultimately make the decisions.

Some investors choose to go with a broker so as to bypass the pressures of managing their own stock portfolios. Doing so requires them to look around for a good broker, one who has a proven methodology and a solid track record.

When all is said and done, however, investors are advised by a number of experts to avoid the buy-and-hold strategy still advocated by some on Wall Street. While patience is a virtue, investors should also reflect on how past stock market crashes burned those who held on too long. Team up with Stocknod stock alerts or the HotSheet for today’s bullish stocks.

Read the latest Free Investing Tips  from Stocknod expert Gregg Andreski