The Delicate Balancing Act of Selling Short

Physician's Money Digest, August 2007, Volume 14, Issue 8

For the novice or casual investor, selling stocks short is not a typically traveled path of investing. Selling short is when a stock is borrowed and sold at a specific price in anticipation that the stock price will fall so that those shares can be bought back at the lower price, resulting in a profit. It's a way for an investor to make a profit on the downfall of a stock. This practice is risky because there is no guarantee the stock price will fall.

Some mutual funds and exchangetraded funds (ETFs) are trying to take advantage of short selling by designing funds to short the broad market or parts of it. These funds are less risky than short selling individual stocks because you can only lose as much as you put in, whereas short selling a stock could set you back a large amount of money, depending on how high the stock climbs. ProShares Advisors have had success with these funds, earning some $3.9 billion in return. These types of funds are permitted in IRAs, when short selling is not. However, BusinessWeek suggests that investors pair short funds with long-term funds to balance out risk. Remember, timing is important. If the market takes an upswing, losses on these short funds are possible.