Stock Tricks

There are several "tricks" that experienced investors use to make a profit. Like the rest of the stock market, these tricks are very risky, and you should know what you are doing if you use these tricks. The tricks include selling short, buying on margin, and buying warrants.

The first risky trick is short selling. Basically, short selling is selling a stock before you actually buy it. To sell short, you first borrow stocks from a broker. Then, you sell them immediately on the market. You keep the money that you earned from selling the stocks, and wait, hoping that the price for the stock will drop. If the price for the stock does drop, then you can buy back the stock, and give them back to your broker. You will then have made a profit, since you sold them for more than you bought them for. For example, if you borrow 100 stocks at 4 dollars per stock, and sell them in the market, you have 400 dollars. If you wait a while, and the price of the stock decreases to 2 dollars per stock, you can buy 100 stocks for 200 dollars. You then return the 100 stocks to the broker, pay a little bit of interest, and keep the other 200 dollars. Unfortunately, selling short does not always end as well as that. Consider if you borrow 100 stocks at 4 dollars a stock again. You then sell them and get 400 dollars. You wait a few weeks, but the price of the stock continues to increase. Before you know it, the price of the stock is 6 dollars. You have to give the broker his stocks, and you have to pay him interest. This means that you have to pay 600 dollars to get the stocks back, and right there, you just lost 200 dollars.

Buying on margin is another trick which is basically buying stocks on borrowed money. You must first set up a margin account, which has a minimum balance of 2000 dollars. Once you have a margin account, you can borrow up to 50 percent of the cost of buying the stocks you want. By borrowing 50 percent of the cost, you are controlling something twice as valuable as what you paid for. This will enable you to gain more profits with less money. For example, if you put in 500 dollars, and the broker lends you 500 dollars, then you have 1000 dollars to work with. You then buy 100 stocks at 10 dollars a stock. If the price for the stock increases to 15 dollars, and you sell at that price, then you have 1500 dollars. You then pay back the broker the 500 dollars plus interest, and you have made roughly 1000 dollars, doubling your initial investment of 500 dollars,. If you had only invested 500 dollars of your own money, you would have only gotten 50 stocks. Then, after selling them for 15 dollars, you would have made only 750 dollars, which is only 250 dollars more than your initial investment. The risky part about this is that your losses are also magnified. Had you bought 100 stocks on margin at 10 dollars, and the price had dropped to 5 dollars, you would have lost all 500 of your dollars, since you have to pay the broker back his 500 dollars. If you had invested only your 500 dollars and bought 50 stocks at 10 dollars, and the price dropped to 5 dollars, then you would only have lost 250 dollars.

Buying warrants is a less risky trick. A warrant is sold by a company that is planning on issuing stocks soon. The warrant gives you the right to buy stocks at a certain price. For example, if you buy a warrant to buy a stock at 5 dollars for 1 dollar, and the stock ends up being issued at 10 dollars a share, then you can sell the shares for a profit of 4 dollars per share, since you paid only 6 dollars total, and sold them at 10 dollars.