By: Kimberly Nix Murray
People ask me can I make a living off of day trading and the short answer is yes, however, it is not easy money, you must be disciplined and due your due diligence in research and watch your sizing, especially if you are shorting.
At Elite Trader, LLC aka www.fastmoneytraders.com Luke Murray opens our chatroom at 6:30 A.M. CST for premarket trading and we sometimes due after-market trading depending on how the market is doing and if there are available trades. We share our screen out to our clients to follow our trades throughout the day. Luke is one of the most consistent day traders in the world specializing in shorts.
What does it mean to short a stock?
Most investors and history shows us that when we buy a stock it generally goes up thus earning a profit when we sell it high. However, if you are betting that a stock is going to go down after buying it, you short it.
Say you buy 100 shares of stock at $10.00 a share from your Broker, (like eTrade) that is going to cost you $1,000.00. As time goes on you think the price is going to fall. You buy 100 shares at $8.00 a share = $800 and return them to your broker and make $200 in profit.
Another example is you buy 100 shares of stock at $25.00 a share from your Broker that is going to cost you $2,500. As time goes on you think the price is going to fall to $20.00 a share, so you short it. You buy another 100 shares and borrow from your Broker which costs you $2,000. You return them to your broker and make $500 in profit.
Shorting stocks involve borrowing money (from your Broker). Keep in mind that you are using your investment in the brokerage firm as collateral. (You must meet the minimum maintenance requirement of 25%) in your account and if your account slips below this then you will be forced to cough up more cash or liquidate your position (sell your stocks for a loss). Sizing is very important when you are shorting a stock, as your broker can squeeze you where you will be forced to bring more money to cover the margin.
The standard margin requirement is 150%, which means that you have to come up with 50% of the proceeds that would accrue to you from shorting a stock, but the margin can even higher than that, which is why your sizing is important when shorting stocks. Shorting a stock can be risky, as your losses can be infinite, whereas if you buy a stock expecting it to go up, you can never lose more than your initial investment. Also, if a stock shows that the direction is generally upward then keeping a short position open for a long period of time can become risky.
Disclaimer: The information provided in this article is as a service to investors. It is neither a legal interpretation or a statement of policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law. Stop Loss orders and Stop Limit orders may not be available through all brokerage firms. Investors should contact their broker to determine which orders are available for buying and selling stocks, and their broker’s specific policies regarding these types of orders.