How to Short a Stock

Welcome to StockUp, the investing newsletter that hopes none of you are currently underwater or on fire, and encourages you to donate to the American Red Cross's disaster relief efforts. -------------------------------------------------------------------------------------------------- [View this email in your browser]( Welcome to StockUp, the investing newsletter that hopes none of you are currently underwater or on fire, and encourages you to [donate to the American Red Cross's disaster relief efforts](. This week, we'll walk you through what to do when you think a stock's a stinker — and want to make money from its rottenness. Plus, the three questions you need to answer before you buy a stock, and four things a well-known financial pundit gets wrong about investing. — Nathan Alderman, StockUp Editor SWEET, SWEET SCHADENFREUDE How to Short a Stock --------------------------------------------------------------- We all know what to do when we like a company and think it'll do well in the future: Buy shares and hang on to them. But what if we find a company we absolutely loathe? One we're sure is headed for a future of ignominious failure? And what if we want not only to [point and laugh]( as it goes down in flames, but also to point, laugh, and potentially profit? To make money — maybe — from your certainty that a stock's subpar, you'll need to sell it short. Literally. When you short a stock, you borrow its shares from another investor, then immediately sell them. You're hoping that by the time you have to buy those shares back to return them to the lender, you'll be able to do so much more cheaply. If so, you'll pocket as profit the difference between your initial selling price and your later buying price. In short (no pun intended), you're aiming to sell high and buy low. You may have already noticed one of the potential risks here. We humans tend to be pretty bad at predicting the future, and if we bet wrong on a short, there's no limit to just how much money we could lose. But if you bet right — based, we hope, on your own extensive research — you might just make money off a stock's misfortune. And you'll do the market a valuable service by providing a necessary counterweight against its occasional fits of irrational exuberance. Learn every step you need to know to short a stock from Fool Dan Caplinger — and uncover even more of the risks involved — when [you read the rest](. --------------------------------------------------------------- Already subscribed to a premium service? [Click here]( to view your subscriptions. Not a member yet? [Click here]( to sign up! --------------------------------------------------------------- 1. NAME. 2. QUEST. 3. FAVORITE COLOR Don't Buy a Stock Unless You Can Answer These 3 Questions It's easy, when investing, to buy a stock for the wrong reasons. Maybe you like its ticker symbol. Maybe everyone else is excited about it. Maybe it just seems irresistibly shiny. Sometimes this approach works out. Sometimes ... not. To make sure you're on firmer footing before you buy a stock you'll hopefully hold for years to come, Fool Maurie Backman encourages you to answer these three crucial questions first. - How does the company make money? Ideally, it does so in a way you can easily understand, and which is also legal and doesn't involve smuggled diamonds or something. (Also important: Does the company actually make money? If not, is there a good chance it will in the future?) - What is the company's competitive advantage? In short, what does it do better than its competitors? - What might go wrong with this company? You shouldn't buy into a company without knowing why you might want to get out of it. When you've planned ahead for a worst-case scenario, you'll be better prepared to act accordingly if it actually comes true. Learn more about what makes these questions so important when you [read the rest](. --------------------------------------------------------------- ALEXA, HOW CAN I DEFUSE A FALLEN TREE BEFORE IT EXPLODES? [Smart Speaker] Not sure what to ask your smart speaker? Keep up with what's happening in the market by asking your Amazon Alexa or Google Home to "Play Motley Fool podcasts." --------------------------------------------------------------- I'M SORRY, DAVE, I JUST CAN'T DO THAT 4 Things Dave Ramsey Gets Wrong About Investing Financial guru Dave Ramsey gives plenty of advice that we Fools wholeheartedly agree with — like paying down fast-accumulating credit card debt, or avoiding it in the first place. And we're all about living within your means! But when it comes to investing, we regret to say that a lot of his sensible-sounding advice just doesn't match up with reality. As Fool and Certified Financial Planner Robin Hartill reports, here are four ways we politely disagree with Dave: - You don't need to banish all forms of debt before you start investing. By all means, pay down those 14% APR credit cards! But you'll lose more money than you stand to gain if you put off investing because of, say, a 3% APR car loan. Neglecting your 401(k) to instead pay off relatively low-interest loans can cost you dearly — especially since compound interest means that the sooner you start investing, the more money you'll end up with. - Don't invest in front-load mutual funds. Ramsey argues that paying a fee up front to invest in a fund is more transparent and costs you less in annual fund maintenance fees. But there are plenty of high-quality, low-cost funds and ETFs that won't take a chunk of your change up front. And while Ramsey touts the wisdom and experience of financial pros, evidence shows that the vast majority of them lose to the market compared to a cheap, automated index fund. - Don't expect 12% returns on your investments. Ramsey's looking at the total average return of the S&P 500 over the last 80 years or so. But that doesn't fully account for the market's ups and downs, or the money-devouring cost of inflation. A more accurate calculation suggests that you can expect post-inflation returns closer to 7% from the market. - Don't plan to withdraw 8% per year from your retirement savings. Ramsey bases this figure on a lot of overly optimistic, and often risky, assumptions — including that rosy 12% annual return figure above. Conventional wisdom suggests you should plan to draw down 4% of your savings each year in retirement to make your money last the longest. True, that figure may be too conservative, but it'll likely leave you in better fiscal shape. For more details on where we differ with Dave, and why it should matter to you and your money, [read the rest](. --------------------------------------------------------------- ACCOUNTABILITY? WHAT A CONCEPT! FEATURED PODCAST [Rule Breaker Investing]( Reviewapalooza!: Farewell to the First 5-Stock Sampler In September of 2015 we offered podcast listeners a free taste of David's stock picks with 5 Stocks for the Next 5 Years. It became the first of many 5-stock samplers, including 5 Great Stocks You've Never Heard Of in 2017. Today we close out those two samplers, tally up the score, and see how much smarter, happier, and richer we are as a result. [Subscribe on iTunes]( --------------------------------------------------------------- OH, THE HUMANITY! Quick Reads - ["An intricate fraud built on dozens of lies":]( Yes, but how do you really feel? Short-seller Hindenburg Research ramps up its war of words against electric-auto maker Nikola (NASDAQ: NKLA). - [Stimulus Wars, Episode 4 — A New Hope:]( Could a bipartisan compromise put more money in struggling Americans' pockets? - [Stay frosty:]( Read this before you chase Snowflake's (NYSE: SNOW) red-hot IPO. --------------------------------------------------------------- DEEP BREATHS > BIG BRAINS Social Media Post of the Week [In investing, staying calm > being smart.]( [See all our Tweets!]( Join the 1,300,000+ people who follow us! [Facebook]( [Twitter]( [Instagram]( [YouTube]( [LinkedIn]( We work fervently, fastidiously, and Foolishly to make sure all the facts and figures we publish in our emails are 100% accurate and up to date. Returns as of September 16, 2020. Have a question or topic you'd like to see covered in a future edition of Stock Up? Email us at stockup@fool.com. For questions about your Motley Fool account, subscriptions, or anything else related to The Motley Fool, please email membersupport@fool.com Our mailing address is: The Motley Fool | 2000 Duke St. | Alexandria, VA 22314 Want to change how you receive these emails? You can [update your preferences]( or [unsubscribe from this list](. This is a promotional message from The Motley Fool Copyright © 1995-2020 The Motley Fool. All rights reserved. [Legal Information.](