How to short a stock in the Stock Market Game

Buying a stock is a bet that the price goes up. Shorting is the same bet in reverse: you profit if the price goes down.

Mechanically, a short sale borrows shares you don't own, sells them at today's price, and commits you to buying them back later to return them. If the price fell in between, you buy back cheaper than you sold and keep the difference. If it rose, you buy back more expensively and the difference is your loss.

In a simulated competition this is compressed into one step. You place a short order, the platform records the price you shorted at, and your position gains value as the stock falls below that price and loses value as it rises above it. You close it with a buy-to-cover order.

This is the part that catches people out, and it changes what a good idea even looks like.

The Stock Market Game is an end-of-day game. An order you place at any point during market hours fills at that day's 4:00 PM ET closing price — not at the price on screen when you clicked. Place it after the close and it fills at the *next* trading day's close.

Two things follow. First, intraday moves you can see are not moves you can trade; only the closing price matters to your fill. Second, orders sit pending and cancelable right up until the close, so there is no earlier cutoff to race — but there is also no way to react to something that happens at 3:59.

It also means research that arrives after the close is a day late. That's the reason Zenith publishes its daily thesis at about 3:30 PM ET rather than after the bell.

A stock you buy can fall to zero. That is a total loss, and it is bounded — you cannot lose more than you put in.

A stock you short can rise without any ceiling. If you short at $4 and it goes to $12, you have lost twice what you would have lost buying it and watching it go to zero. This is the single most important structural fact about short positions, and it is why a short that goes wrong can go wrong quickly.

The specific way this happens is a short squeeze: a stock rises, shorts are forced to buy back to close their positions, that buying pushes the price higher, which forces more shorts to cover. Heavily shorted small stocks are where this shows up, and they are also, awkwardly, exactly the stocks that show up on top-gainer lists.

Nothing about a simulation changes the arithmetic. It changes only the consequence of getting it wrong.

A stock going up is not a reason to short it. Plenty of stocks that rise 30% in a day rise again the next day, because something genuinely changed — an earnings beat, an acquisition, a drug approval.

The setups worth examining are the ones where the size of the move is out of proportion to whatever caused it, or where nothing identifiable caused it at all. A small company with no filing, no news and a 60% move on enormous volume is a different proposition from a profitable company that beat its earnings estimate.

Separating those two is the whole problem, and it is what Zenith's screener and its daily thesis exist to help with. It is not a solved problem, and the engine page is candid about where it gets things wrong.

• Why stocks often fall after a big one-day spike
• A strategy primer for the DECA Stock Market Game
• A short-selling glossary for the Stock Market Game
• How orders fill in the Stock Market Game
• The SIFMA Foundation, DECA, and the Stock Market Game

Not investment advice — an educational tool for the DECA Stock Market Game. Terms.