Advanced StrategiesUnderstanding Penny Stocks by Peter Leeds

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Short Selling Penny Stock

Short selling is the strategy of selling the shares first, then having the commitment to buy them back at a later date.

Traders that short a stock are betting that it will decrease in value, so that when they go to fulfill their commitment to repurchase the shares, they can do so at a lower price. Their profits are equal to the difference in price from the original sell to the subsequent buy.

As many brokers do not allow traders to short stocks under a certain threshold price (ie-$5.00, but it is dependent on the broker), it is often difficult to short penny stocks. The broker also needs to have a client who owns the actual shares, for them to allow anyone to short that penny stock.

This is probably for the best, as I discourage any new or intermediate investors from shorting stocks at any level, and penny stocks specifically.

Unlike regular investing, where the most you can lose is 100% of your investment, with short-selling your losses are unlimited.

For example, if you sell short a stock at $6.50 and that stock rises to $85.00, you are legally required to buy back the same number of shares you sold short at that price. 100 shares at $6.50 means you took in $650, but now it will cost you $8,500 to buy them back. You may have only had a few hundred dollars to begin with!

The potential of unlimited losses are not appropriate for most traders.