Know the risks of selling stocks short

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You've heard the saying, "Don't sell yourself short." Those pearls of wisdom could apply to an investment strategy known as selling stocks short. I'm Barbara Whelehan with the Personal Finance Minute.

Selling stocks short involves borrowing shares from a broker and selling them right away, with the hope that stocks shares will fall in price. Then when you buy the shares at a lower price to repay the broker, you can pocket the difference.

This is a dangerous practice. When you go long, or buy a stock with the expectation that it will go up, your losses are limited if the stock falls in price, since stocks can't fall below zero.

However, when you sell stocks short, your gain is limited by the fact that a stock can't fall below zero. And your loss is potentially unlimited because a stock can keep rising forever.

Plus, there are costs involved in setting up a margin account. So, selling stocks short can backfire big time. For more on this and other personal finance information, visit I'm Barbara Whelehan.


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