By Brigitte YuilleFirst, let's describe what short selling means when you purchase shares of stock. In purchasing stocks, you buy a piece of ownership in the company. The buying and selling of stocks can occur with a stock broker or directly from the company. Brokers are most commonly used. They serve as an intermediary between the investor and the seller and often charge a fee for their services.
When using a broker, you will need to set up an account. The account that's set up is either a cash account or a margin account. A cash account requires that you pay for your stock when you make the purchase, but with a margin account the broker lends you a portion of the funds at the time of purchase and the security acts as collateral.When an investor goes long on an investment, it means that he or she has bought a stock believing its price will rise in the future. Conversely, when an investor goes short, he or she is anticipating a decrease in share price.
Short selling is the selling of a stock that the seller doesn't own. More specifically, a short sale is the sale of a security that isn't owned by the seller, but that is promised to be delivered. That may sound confusing, but it's actually a simple concept. (To learn more, read Benefit From Borrowed Securities.)
Still with us? Here's the skinny: when you short sell a stock, your broker will lend it to you. The stock will come from the brokerage's own inventory, from another one of the firm's customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later, you must "close" the short by buying back the same number of shares (called covering) and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money.Most of the time, you can hold a short for as long as you want, although interest is charged on margin accounts, so keeping a short sale open for a long time will cost more However, you can be forced to cover if the lender wants the stock you borrowed back. Brokerages can't sell what they don't have, so yours will either have to come up with new shares to borrow, or you'll have to cover. This is known as being called away. It doesn't happen often, but is possible if many investors are short selling a particular security.
Because you don't own the stock you're short selling (you borrowed and then sold it), you must pay the lender of the stock any dividends or rights declared during the course of the loan. If the stock splits during the course of your short, you'll owe twice the number of shares at half the price. (To learn more about stock splits, read Understanding Stock Splits.)
Short answer: value investing, the investing process espoused by Warren Buffett, Benjamin Graham, Seth Klarman, Joel Greenblatt, Bruce Greenwald, Bruce Berkowitz, Charlie Munger, and generally a disproportionate number of great investors.Slightly long answer:
Depends what you mean by "short-term" gains. I think you mean how do you maximize growth over a 5 year period as opposed to booking short-term gains over and over again (e.g. every 3-6 months) over 5 years.If I have the interpretation correct, then value investing is the way to go given that you actually have what's considered a long-term time horizon in the investment world (2-5 years). Most people focus on <2 years (most hedge funds, traders, and even many large asset management firms).
The overarching theme of value investing is buy assets for significantly less than what they're worth by exploiting market inefficiencies created by institutional constraints, forced selling, fear and greed, and other market/investor irrationalities. Look at assets that are ignored, unloved, in the dumps, etc.; engage in a thorough analysis of the value of the asset; invest only when there exists a considerable margin of safety (i.e. when you're getting a crazy bargain - 50% discount to intrinsic value); and when you find such an asymmetric risk-reward, bet big (something like 5% of your assets, so that you have a total of ~20 positions).
It's a simple strategy but a difficult one - which seems to be the case with all good ideas (that is, they are simple but difficult). You'll have to learn a lot and commit a decent amount of time to the endeavor, but you'll also stand to reap great rewards. To learn more, look up some of the people I mentioned above and start reading what they've written/said.
Happy bargain hunting!
I recently started making investments and did a bunch of research on exactly this topic (I am 26). I also had some friends ask me about what I decided. So what follows is an edited version of what I told them. It is a compilation of my personal findings or opinions based on the general consensus of what I researched as applied to my personal situation and preferences. Your situation and preferences will be different.Basic Principles:
- Invest in low-cost broad based index funds. Fees and costs have more to do with historical returns than who is making picks. This is because in the end you can't beat the market. So you just invest in the market as a whole.
- Decide on an asset allocation mainly out of two categories: equities/stocks (higher risk/return) and bonds (lower risk/return). You can also throw in commodities such as gold, which have different properties, but it is more nuance than what I want.
- You can also make another decision axis along domestic or foreign stocks. Generally speaking, domestic is seen as lower risk/return while foreign is higher risk/return. But of course that depends on where you are investing it (Europe vs Asia) and how much you believe in Amerikuh!
- Pick a time period and re-balance according to your original allocation. This protects you from doing stupid shit. If your stocks did well, then they'll be a higher percentage of your allocation. Sell some and buy bonds to re-balance, this forces you to stick to the plan and realize some gains.
So for my profile - young, expecting regular income to be steady and increasing, and in it for long term gains - I wanted relatively higher risk/return. So in terms of actual investment strategy what I did was this:
- Stock/Bonds ~ 80/20
- Domestic/Foreign ~ 60/40
- Keep 6 months of living expenses in cash equivalent (savings)
- Set aside some money to spend on fun, and use the rest for this long-term investment
- Invest 90-95% of that amount using the above asset allocation
- Use the remaining amount for vanity stock picks or ones I personally believed in (I bought some AAPL)
A big question for me as I did this research, well so what actual funds fit these profiles. This is not an endorsement, but I went with Vanguard ETFs (preferred) or mutual funds. The difference I never fully groked, but I don't think is is too important but its supposed to be lower cost. Here are some of the specific ones I did:VTI - Vanguard Total Stock Market ETF (US Stocks)
VXUS - Vanguard Total Non-US Stock Market ETF (Foreign stocks)
VBMFX - Vanguard Total Bond Market (US Bonds)In general, you should just spend some time to figure out your risk profile. Then pick something, do it, and then forget about it (until rebalancing time). It's really not worth stressing or obsessing about it trying to make minute optimizations. This is a low-stress, basic principles strategy.