When it comes to investing in stocks, there are multiple strategies that you could adopt. Many people prefer to hold their shares long-term, while many opt for a day trading strategy. Even in these two types, there are various sub-categories of strategies, which all boils down to personal preference.
However, some strategies tend to be riskier than others and might require a deeper understanding of the market. Especially in today’s world, when the market indicators have gone beyond the white paper, even a tweet or a forum discussion on Reddit might cause a stock to plunge. There is now a new phenomenon known as a meme stock in the investing world. Based on a discussion on Reddit and other social media platforms, traders started shorting Gamestop stock back in 2021, which coined the term “meme stock.”
When it comes to investing strategies, shorting a stock has been a common technique used by traders willing to take greater risks for greater rewards. The basic concept of shorting goes against the traditional approach as it focuses more on the bearish trends as you bet against the market. Herein, you gain a margin if the stock you shorted falls in price.
In the case that you are new to the stock market and investing, you may not know all the terms used in the market. So, here are some of the common terminologies that you should know about if you are planning to short a stock.
1. Short stock
This simply refers to the concept of shorting, where you borrow a stock from the brokerage and sell it to another investor. Under this strategy, you only sell or return the stock to the brokerage when you are sure the price will decline. If the price does not decline, then you might have to pay more for the stock than the price you borrowed it at.
2. Short position
It is a trading setup that is common while you are making short-term trades. A short position refers to the sale of a security to repurchase the stock when the price plunges.
3. Short Squeeze
The fundamentals of shorting a stock are simple as you assume that the stock’s market or price will dwindle. However, it is pretty challenging to predict this accurately.
If the prices increase rather than decrease, you must choose between paying the interest on the borrowed stock in the hope that the price will drop eventually or exit by paying a premium on the buying price of these new shares.
4. Margin Account
It is a type of account that enables you to use a line of credit from the brokerage to purchase stocks. However, one needs to keep collateral in either the form of securities or cash. Moreover, the margin account also accumulates interest and is often based on the number of shares and other factors.
The amount of collateral and the interest on the margin account vary from brokerage to brokerage.
If the opportunity to short a meme stock again presents itself, you will need a margin account to trade.
These are some common terminologies you will encounter when you begin short-selling a stock. You must brush up on all the investment terms to understand all the white papers and other literature properly.