When people buy stocks, they want the stock price to go up. This is called a “Long” position.

If you want the stock price to go down, you are taking a “Short” position.

So, when you are “shorting stocks”, you borrow stocks from your brokerage company, sell them at the current market price, and get the proceeds. Since you borrowed that stock, you have to give it back. If the price of that stock falls, you can buy that stock back at a cheaper price and give it to your brokerage firm.

Let me give you an example:

Couple of months ago, the shares of Citi Group (C) were selling for $5.00. Say, you got a feeling then that the stock price of C will go down and you shorted 1000 shares of C. You proceeds would have been $5000. Remember that you borrowed these shares and you have to buy them back from the market. Now, as of today, the stock price of C is $3.40. To buy 1000 shares, you have to pay $3400. Your total profit is $5000-$3400 = $1600.

Sir, you have just made some profit.

BUT…there is always a “BUT”. If the stock price had gone up, you would have lost money.

Facts about “Shorting Stocks”.

1. When you open a position, it is called “Short” position. When you close this position, it means to “cover” your position.

2. When you open an online trading account, you are generally not allowed to short stocks. You have to have a “Margin account” and the permission of your broker to short stocks.

3. Shorting stocks can be very risky because your potential loss is unlimited. When you short stocks, you are hoping the price will go down. What if the price goes up and goes up very high. Theoretically, it can go to infinity and beyond. To cover your short position, you may have to spend all your wealth.

I have a margin account at Zecco.com(aff.) and I can short stocks, if I want. It is just a useful tool to have, because you can make money if the stock market goes red.

If you have read the previous post, then you have the basic idea of what stocks are. Now, without further ado, let’s jump into the important part- How to buy stocks?
To buy stocks, you need the help of brokers. There are basically three kinds of brokers:

1. Full-Service Brokers
2. Discount Brokers
3. Online Brokers

Full service brokers will give you the advice on what stocks to buy. They will do all the research for you and advise you to take necessary actions. For a small investor, they are might prove little costly, but rightly so. Since they do all the figuring out, they charge more than others. If you want to get more info on Full-service brokers then call National Association of Securities Dealers at 800-289-9999.

Discount brokers, as the name suggest charge less commission than Full service ones. You have to do your own research. You just tell them what stocks to buy and they will process your order. They charge between $15 to $30 for 1000 shares or less.

The third one and perhaps the most convenient for small investors are online brokers. Now a days, most Full-service brokers are opening online services and charging less commission. They are literally hundreds of online brokers around. Trading has become so much faster and easier because of online brokers. If you are not a person who likes to deal with people, then all you have to do is open an account with an online broker. Unless you want to, you never really have to see or talk to anyone. You do your own research, deposit money in your account, choose the stock and number of shares you want to buy and place your order. It is that simple. You will get all your trading confirmations online.

I will post detail information on how to place trade orders and review some of the cheapest and the best online brokers in my future posts.

Newbies, let’s start with the basics- What are stocks? Before you begin buying and selling stocks you have to understand what they are.

Stocks are basically a share in the ownership of the company. If you own stocks of a certain company then technically you own part of that company. Stocks are issued or sold by the company to raise its capital. If the company performs well then the price of its stocks increases and the investors make money. On the other hand, if the company fails, then investors loose money. So, investing in stocks can make you a lot of money, but there is also the risk of losing everything.

Although I said owning a stock is like owning a piece of the company, but that does not mean you have any say in the day to day running of the company. The only main power you have as a shareholder of a public company is the power to vote to elect the board of directors. The power of your vote depends on the number of shares you hold. In short, more shares more power.

Another important thing about stocks is limited liability. If you own stocks of a company, you are not responsible for paying the debt of the company. You are entitled to unlimited profit (due to increase in the value of shares and/or dividends), but you can only lose what you have invested.

Did I say unlimited profit? Yes, I did. In theory, the price of a stock can go to infinity, but it never ever happens. Although, there are many cases where the profit have been more than 1000% or 5000%. In fact, much more. Yes, there are risks and there are rewards. You can let your cash sit in your savings account and get a measly 2-3 percent every year or invest into something with way more return potential.

Maybe you prefer keeping your money in the savings account, but my advice to you is at least understand what stocks are and how to buy and sell stocks. Ignorance is not always bliss, it only causes opportunities to be missed.

To all the Stock Noobs, I will end this post with an old Chinese proverb:

“Give a man a fish; you feed him for a day. Teach a man to fish and you feed him for a lifetime”