6. Margin Calls – This is probably the scariest thing about owning a short position in any company.If the stock you’ve decided to short moves in the wrong way (stock price rises), your broker will insist that you do one of two things. One, deposit more money into your account, enough to cover the purchase price of the stock at the current price. The other choice is that your broker will insist that you sell some of your long positions to cover the margin call or they will do it for you in their own way.

7. Early Sale – If the original owner of the shares that you borrowed decides to that they want to sell the stock, you must replace it — either by finding other shares through your broker or buying it on the open market. Remember all you did originally was “borrow” the shares.

8. Short Squeeze – If you’re new to the stock market then this is a term that you might not be familiar with. It’s a term that is used quite often on Wall Street. A short squeeze is when the price of the stock jumps up in value quickly, causing short traders to “cover” their positions. Which means that they have to buy shares to cover the ones that they borrowed. This typically causes higher prices, which prompts more people to sell and to take profits. This is something that you may never want to get caught in the middle of because of the ferocity of the situation as well as get quite expensive.

9. Properly Covering You Position – You may not even realize it, but you can have a short and a long position at the same time. When you go to “cover” your short position, you need to tell your broker clearly that the shares you’re buying are to cover your short position. If you just buy the share while still having a short position, you’ll have conflicting positions. Many times people are in a rush to cover their position, that they may not even realize their mistake of overlooking their selection, especially online traders.

10. Dividends And Taxes – If you have borrowed and shorted a dividend-paying stock, you will receive the dividends, but you, in turn, must pay the original owner the value of those dividends. Also, should you hold a short position for more than one year, well, tough luck — the IRS still treats capital gains as short-term gains. Ah, Uncle Sam is always reliable!

I hope these ten things I’ve given to you will help you in your trading. If you are new to the stock market, then it’s wise to stay away from shorting stocks until you learned more of the basics.

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There are many words and terms used that you may be unfamiliar with. Here are the meanings of some

This post will cover many of the words and terms that are used when trading stocks. These are only a few but I’ll cover more in upcoming posts.

Cost Basis:
Cost basis is referring to what you pay for the stock. If you were to buy 100 shares at $30 per share then your cost basis would be $30. Now if you go ahead and by another 100 shares as the price drops to $25 per share, your new cost basis would be $27.50 per share (100 X $30)+(100 X $27.50)=$5750.00/200 = $27.50

Incrementally:
When you start to build a position in a particular company, you don’t go ahead and buy all your shares at once. Stock prices rise and fall and the time and if you purchase all your share at on price then the value falls you either have to sell at a loss or hold until the price comes back up in value. Buying incrementally will also help you lower your cost basis.

Diversification:
As you build your portfolio you need to keep in mind that you can’t just buy stocks in one sector. If you were to buy stocks in three companies and all of them were in the energy sector, you would lose a lot of your capital (cash) on a day that the sector took a big loss because the price of oil dropped. The idea is to not put all your eggs (investments) in one basket. What you need to do is have your investments spread out over different sectors. You also need to be aware what sectors effect other sectors (more of that in another post).

Fundamentals:
When researching any stock you need to look at what is referred to as fundamentals. It’s basically the financial information that can be found in a company’s earnings report or annual statements. An earnings report is information that the company puts out quarterly to inform their shareholders of the condition of the company as well as any future guidance.

Long/Short:
At times you will hear a stock analyst state they “long a stock” or “short a stock”. When they refer to “long”, they mean that they are invested in that particular stock for it to go up in value. If they state that they “short” a stock, they expect the company’s stock will go down in value because of one of numerous reason and they’re investing in it to go down in value.

Dividends:
Some companies will give their shareholders a cash payment. This is usually done on a quarterly basis and is given to shareholders that are listed on record at the time of payment.

Yield:
The yield is calculated by figuring the annual dividend divided by the stock price. The yield is referred to in percentage terms such as 5%.

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