Getting Investment Leverage in the Markets

Tom Lydon

During the last several bear markets, you might have been well served by reducing your exposure to equities. A number of investors—perhaps even you—decided to “short” the market instead of exiting entirely. But why go short?

Short selling, as it pertains to stocks, is the selling of a security you do not own.

It works like this: Say you believe that Company A is about to take a big hit and its shares are going to lose value. You call your broker and tell him that you want to sell 100 shares of Company A (which you do not own) at $50 per share. The broker will borrow those shares from another client’s account and effectively lend you the shares to sell short, and your account will be credited ...