Short selling, or shorting stocks, is a strategy stock traders use to make money in the stock market when they think things are going to be going south. Shorting stocks is kind of the opposite of “buy low, sell high.” When a trader is a short seller, they profit when a stock they are shorting declines.

When you short a stock, you are actually borrowing shares today, and then buying the same stocks back on a later date to “cover” your position. Assuming you purchase the shares when the stock price has declined since you borrowed them, you’ve made a profit. Otherwise, you have to buy them back at a higher price and you lose money. All of those who predicted a decline in the stock market at the beginning of 2008 and shorted the market are sitting fat and happy right now.

To illustrate the concept, look at the example given by Investopedia:

Suppose that, after hours of painstaking research and analysis, you decide that company XYZ is dead in the water. The stock is currently trading at $65, but you predict it will trade much lower in the coming months. You decide to take the plunge and short 100 shares. The transaction is straightforward – most online brokerages will have a check box that says “short sale” and “buy to cover.”

One of two things can happen in the coming months:

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The short selling strategy is a bit more complicated and often more confusing than simply buying stocks that you think will go up in value (or going long). Shorting stocks also comes with its risks.

• Since you are borrowing the shares, you do not earn any dividends. In fact you technically owe the owner of the shares any dividend payments.
• If the stock splits while you are shorting them, you now owe twice the shares at half the price.
• Profits are considered short-term capital gains, which can be taxed as much as 35%.

Why Short Selling is Not a Typical Strategy for Investors

Notice that I mentioned that stock traders short stocks, not investors. That is because investors do not play the short selling game for a number of reasons:

• Short selling is a high risk game that resembles gambling.
• Shorting a stock requires buying on margin, and the risks entailed when borrowing on margin constitutes a whole other topic.
• Investors are in the business of buying companies that have long-term shareholder value. Short selling requires speculation that the share price is going to decline in the short term.
• Investors find ways to minimize fees and taxes in order to obtain the greatest return on investment. Paying short term capital gains tax rates requires a much great return on the investment to actually experience a gain after paying taxes. This, in turn, increases risk.
• Investors are in for the long-term, and historically stocks trend up and appreciate over time.
• When you short a stock, there is no cap on how much you can lose. There technically is no limit on how high a stock’s price can go, and stock shorters owe money as values increase. On the other hand, when you “go long” on a stock, the maximum amount you are risking is the money you invested to purchase your shares.
• Even if you are right about the direction the stock will go, there is no telling how long that could take, and holding a shorted stock is a risk in itself because the broker can call it back if needed.

Why Would and Investor Short Stocks?

There is one circumstance that shorting a stock could be a wise move for an investor, and that is when used as insurance. In other words, an investor may short a stock in order to protect from losses. For example, if an investor owns a long position in MSFT and is afraid that it may go down in the short term, they can add a short MSFT position to their portfolio so they offset any loses. This is known as hedging your investment.

The bottom line is short selling is an advanced stock trading strategy that should not be experimented with by the inexperienced investor. Predicting the short-term direction of a stock and timing the market is not an easy task, if consistently possible at all. Betting against the historic uptrend of the market is also a loser’s game.

Millionaire Money Habit: Investors put their money on things that are as close to a sure thing as possible in order to limit their risk and increase their earnings potential. Shorting stocks is a speculative move that is too dangerous for the prudent investor that wants to build long-term wealth.

To learn more about making money in the stock market, get the Market Master Trading Course.

I have great admiration for Henry Ford and his accomplishments. There’s no arguing that he was a visionary leader, but what I admire most about Ford was his mindset.

I can’t find the exact quote (please let me know what it is if you know it), but essentially Ford said that if he lost everything, all of his wealth and his businesses, it would be okay because he knew exactly how to build it back again. To me, that statement exemplifies the achievement of financial freedom. When you know that everything can be taken away from you and there is no panic at the idea, you have it all figured out.

Ford knew that between the personal connections he had, his financial intellect and the ability to create value, it would be nearly impossible for him to not be wealthy. But it wasn’t just that. As I was trying to dig up the quote about Ford losing everything and building it back up, I realized he really had a unique outlook and philosophy on life. Here are just a few quotes from Ford that caught my attention:

Failure is simply the opportunity to begin again, this time more intelligently.

It has been my observation that most people get ahead during the time that others waste.

Whether you think that you can, or that you can’t, you are usually right.

There is no man living that can not do more than he thinks he can.

Wealth, like happiness, is never attained when sought after directly. It comes as a by-product of providing a useful service.

As you can see, at his very core, Ford was programmed with a wealthy mindset and it is no wonder he was able to change the face of American business and industry.

By the time Ford passed away in 1947, his fortune amounted to slightly more than $1 billion. In today’s dollars, that would be the equivalent of having $4,500,000,000.

Millionaire Money Habit: Building wealth starts with the mindset and the desire. Discover what you are passionate about and find away to channel that passion in a way that provides great value, and the money will naturally follow.

Read through this collection of some of the top blog posts from around the personal finance blogosphere from this past week. Don’t forget to take some time to read through the Millionaire Money Habits archives while you read the articles below.

Spotlight: Frugal Dad talks about his only regret was not learning about an easy personal finance tip earlier in his life. Find out more by reading If I Only Had A Financial Mulligan: The 50 Percent Savings Plan.

Other Great Posts:

• My Top 5 Personal Finance Blunders at The Wisdom Journal
• Freeze Your Air Conditioning Costs at Cash Money Life
• 7 Surprising Ways to Save Money at beingfrugal.net
• Multiple Income Streams: 10 Ways to Earn Extra Income at The Dough Roller
• Are Your Goals Holding You Back? at Paid Twice
• Secret Money Saving Trick at plonkee money
• Letting Your Emotions Control Your Cinances at brip blap
• Help Your Kids Get Rich: Invest Early at The Digerati Life

Personal Finance Carnivals:

• Carnival of Personal Finance
• Carnival of Money Hacks

Millionaire Money Habit: To learn how to become a millionaire, you need to perpetually improve your financial literacy. Digest as much information as possible and stick to a plan that works for you. Be sure to subscribe to this site’s RSS feed or by email to be notified of new articles posted here.