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Money Girl
067 MG Shorting Stock (My Final Episode)
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Today's episode is my last episode of MoneyGirl's Quick and Dirty Tips for a richer life. I want to thank you all for listening and for all your enthusiasm, encouragement, emails and comments. They've really meant a lot to me. I hope that you found the episodes entertaining and educational. They'll continue to stay posted for listening, and there will be new episodes ahead from another host for the podcast. And now on to today's topic. Doug and Boston called in with this question. Hey, MoneyGirl, this is Doug and Boston. I've been a long time listener, and I'm trying to figure out shorting stuff. I've heard a lot of them burst during this crash about people who made out big who shorted burst during this before it crashed. I understand the basic premise that when you short a stock, you're betting that the stock is going to go down, and that's how you make money. But how does it work? How do you actually short a stock? Hey, that's all. Thanks, MoneyGirl. And thanks for that question, Doug. You're right that when you short a stock, you're betting that the price is going to fall. The concept of shorting a stock is a little counterintuitive because you actually sell before you buy. You borrow shares of a stock you don't own and then sell them. The proceeds from the sale appear in your account. If your hunch is right and the price falls, you can then buy the shares back at a lower price. Here's an example of how shorting works. Let's say you think the share price of Dar Jealing Dumpling Company is going to plummet, so you sell short 100 shares at $10 a share. Your brokerage credits $1,000 to your account. Well, you get lucky, and Dar Jealing Dumpling stock price goes down to $7 a share. So you buy those 100 shares back at a cost of $700. Your profit is $300. The $1,000 credited to your account from selling the stock short minus your $700 cost of buying back the shares. A word of warning. Shorting a stock is more like gambling than investing. It's risky because your losses can be bigger than the amount you invest. Normally, when you invest in the stock of a company, your loss is limited to your investment amount. With shorting, however, if your instincts prove wrong and a stocky short goes up instead of down, you can lose more money than you invest. To continue the example, imagine instead what would have happened if your hunch about Dar Jealing Dumpling was wrong. The stock climbs up to $20 a share, at which point you decide that you just can't take it anymore and you've got to get out of the transaction. You buy back the 100 shares you sold short at $10 a share at the price of $20. Ouch! Your loss is $1,000. The $1,000 initially credited to your account from the short sale minus the $2,000 cost of buying back the shares. In this case, you would have to add $1,000 to your account out of your pocket to close out the short position. If you do short a stock, it's smart to limit your loss by setting what's called a buy stop at the price beyond which the loss is more than you're willing to stomach. It's reasonable to set a buy stop price that's, say, in the ballpark of 5 to 20% above the price at which you sold the stock short. Before you can short a stock, you need to have a margin account, which is a brokerage account that lets you buy stocks with borrowed money. Be sure to check with your broker about your account's initial and ongoing margin requirements. You'll need to keep sufficient cash in the account. You'll also need to pay interest on the money you borrow from the brokerage to short stocks. Shorting stocks isn't for most investors. If you don't want to watch your positions closely, shorting stocks definitely isn't for you. Shorting stocks is speculating, not investing. Remember, there's a risk that you could lose more money than you put in. You'll need to buy back the shares you shorted within a certain amount of time, whether they've gone up or down, so that you can give them back to the lender. If you do decide to short a stock, here are a few tips. Limit your short positions to a very small portion of your portfolio. Only risk play money that you can afford to lose. Limit your loss by setting a reasonable buy stop. And lastly, once you've shorted a stock, watch it closely. So here's hoping that your hunches are right. And remember, keep the bulk of your nest egg in solid, long-term assets and investments that will help you grow your wealth for the future. Since 2012, City has been a proud partner of Global Citizen Festival, using the power of music to inspire people to help end extreme poverty. Tune in on YouTube September 28 to get inspired, experienced performances from top artists. And find out how you can join us in taking action. Together, we can make an impact for the love of making a difference, for the love of progress. City, visit globalcitizen.org/city to learn more. September is a great month for planning. We start thinking about the rest of the year, whether it's back to school, big year-end work projects, holiday plans or travel. Planning ahead is crucial in life, especially when it comes to what happens when you're gone. Getting life insurance may sound daunting, but Policy Genius makes the process a breeze. With Policy Genius, you can find insurance policies that start at just $292 a year for a million dollars of coverage. Some options offer same-day approval and avoid unnecessary medical exams. Policy Genius' technology lets you compare quotes from America's top insurers in just a few clicks to find your lowest price. It's the country's leading online insurance marketplace. And if you ever need help or guidance, they have an expert license support team to answer your questions, handle all the paperwork, and advocate for you throughout the process. It's never too late to plan ahead. Go to policygenius.com or click the link in the description to get your free life insurance quotes and see how much you can save. That's policygenius.com. eBay Motors is here for the ride. With some elbow grease and a whole lot of love, you transform 100,000 miles in a body full of rust into a drive that's all your own. LED headlights, spoilers, whatever you need. eBay Motors has it at affordable prices. And with eBay Guaranteed Fit, it's guaranteed to fit your ride every time. Keep your ride or die alive at ebaymotors.com. Eligible items only, exclusions apply. It's come time for me to focus on new projects. So as I mentioned earlier, today's Money Girl episode is my final one. Thanks again to you, my listeners, and to Grammar Girl in the whole quick and dirty tips gang. It's been great to be part of this podcasting adventure. If you'd like to get in touch with me in the future, you can reach me at the originalmoneygirl@gmail.com. That's the original moneygirl@gmail.com. You can also find me on Facebook under my real name. Elizabeth Carla-Sari. That's spelled C-A-R-L-A-S-S-A-R-E. Chaching, that's all for now, courtesy of Money Girl, your guide to a richer life. As always, everyone's situation is different, so be sure to consult a tax or financial advisor before making important financial decisions. This podcast is for educational purposes only and is not intended to be a substitute for seeking personalized professional advice. Thanks for listening. H5N1 bird flu is spreading in poultry and cows. It's rare in people, but bird flu can make you sick. If you work with poultry, dairy cows, wild animals, or withdraw unpasteurized milk, wear protective gear like coveralls, NIOSH approved respirators, and eye protection, and wash your hands often. If you start feeling sick, seek medical care and tell them you work with animals. Learn how to reduce your risk at cdc.gov/birdflu, a message from CDC. One, two, three, four, those are numbers, but you already knew that. If you want to know what number you're going to pay each month for your car, use Kelly Blue Book My Wallet on AutoTrader. They're really good at numbers. Autotrader. [ Silence ]