How to Make Money Selling Stocks Short by William J. O’Neil

PART 1
 HOW AND WHEN TO SELL STOCKS SHORT
 If you are like most investors, everyone is always telling you about good
 stocks to buy, and most of your investment study and research time is spent
 looking for that one big, winning, buy idea. That’s fine if the overall market
 is consistently positive and strong. But the market has had periods where it
 has spent as much time in a bear market as in a bull market. There are two
 sides to everything—except the stock market! In the stock market there is
 only one side, and it isn’t the bull side OR the bear side, but the RIGHT
 side.
 Few investors really understand how to buy stocks successfully. Even
 fewer investors understand when to sell stocks. Virtually no one, including
 most professionals, knows how to sell short correctly.

Selling Short
 A short sale is one in which you sell shares of a company’s stock that you
 don’t own. You “borrow” the stock certificates through your stockbroker in
 order to make delivery to the buyer of the shares you sold short. It is simply
 the opposite of buying first and selling later. You sell first and buy back
 later, hopefully at a lower price, in which case you will have made a profit,
 less commissions. Of course, if you are wrong, you will have to buy those
 shares back at a higher price and take a loss.
 Before you sell short, have your broker check to be certain that he or she
 will be able to borrow the stock you are selling short. Since you are selling
 a stock you don’t own, your broker will have to borrow the stock to deliver
 to the person that buys the stock from you when you sell it short. You will
 also have to pay to the purchaser of the stock you short any dividend that is
 declared while you are short the stock. Your broker will handle this for you.
 It isn’t a major risk since the stock normally drops in price by the amount of
 the dividend when the stock goes ex-dividend. In addition, since you are
 required to use a margin account to sell short, you don’t pay interest on the
 amount of borrowed margin money. This is due to the fact that the broker
 doesn’t have to loan you money because he obtains the proceeds from the
 stock you sell.
 The mechanics of short selling are relatively simple. If you believe the
 price of ABC Company’s common stock is headed lower, all you do is give
 your stockbroker an order to sell short 100 shares of ABC. Because short
 sales can only be executed on a price increase, your order will be executed
 on the first plus-tick or zero-plus-tick that occurs in the price of the stock. A
 plus-tick is a trade that occurs at a higher price from the immediate, prior
 trade1. 
A zero-plus-tick is a trade that occurs at the same price as the
 previous trade when the previous trade itself was a plus-tick (price increase)

How to Make Money Selling Stocks Short by William J. O’Neil