Jim Cramer, host of CNBC's "Mad Money," is known for his effect on the stock market. In theory, because his Mad Money stock picks often see a temporary jump in value, it can be profitable to sell Cramer picks short after that burst in price. While this might be entertaining and a way to make some quick cash if you are lucky, it is unlikely to be the basis of your entire investment portfolio.
Jim Cramer and Stock Picks
Jim Cramer is a former hedge fund manager who now hosts the show "Mad Money with Jim Cramer" on the financial news network CNBC. He's also a co-anchor of CNBC's "Squawk on the Street." Cramer is known for his outspoken opinions and entertaining style.
Studies have shown that his stock picks can have at least a temporary effect on stock market prices. Jim Cramer "stocks to buy" recommendations often see a temporary jump in value, presumably as investors rush in to buy them after seeing them highlighted on Cramer's show, although they can return to their previous values after a few days or weeks.
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That means that if you see a price jump after a stock appears on the show, and you believe that the stock will in fact decrease in value, you might want to find a way to profit if that decrease takes place.
How Short Selling Works
Short selling of a stock refers to borrowing the stock from someone who owns it and selling it. At some point, you must return the stock to its owner, sometimes with interest, so you will need to buy it back in the future. A stock brokerage can help you if you want to sell stocks short, although you may have to get special approval to allow short selling on your account. Contact a brokerage you do business with or are considering working with to see what is required and what fees are involved in short selling.
Ideally, you will sell a stock and then buy it back at a lower price in order to return it, thereby making a profit. This allows you to make money from short selling stocks if they decrease in value. On the other hand, if you sell a stock short and it instead increases in price and stays at a higher price through when you need to return it, you will need to buy it at a higher price, losing money.
That means there is a large amount of risk in short selling since you can lose as much money as you need to pay to repurchase the stock, even if it shows a sharp jump in value after you sell it short. A situation in which stock prices jump dramatically, forcing short sellers to buy at a higher price to return the stock, is known as a short squeeze.
Short Sell the Cramer Picks
If you want to short sell Jim Cramer's stock picks, you would wait for them to rise in value after being mentioned by Cramer on air. Then, you would instruct your broker to sell them short, selling short as many shares as you wish and feel comfortable taking a risk on. You can probably do this online with many modern brokers, especially the online discount brokers.
Then, you would wait for the stock price to decrease to the original level or a level where you felt you could make a good profit. You would instruct your broker to repurchase the stocks and return them to the original owner, keeping the difference between the sale price and the repurchase price, minus any fees and interest, as your profit.
Keep in mind that if the stock price doesn't return to its original level, you won't make a profit. If the stock price continues to rise, either due to Cramer's influence or other factors, you could even lose money. Whether you're buying, selling or selling short, television stock tips or any other stock tips are no sure bet, and you shouldn't risk money on this strategy or any other if you can't afford to lose it.
Selling the Cramer Picks Directly
If you already own shares of a stock that ends up picked by Jim Cramer on "Mad Money," you may see the stock price increase due to that Cramer bounce effect. Especially if you were already considering selling the stock, you might decide that it's a good time to sell.
When you decide to sell some or all of your stock, contact your broker or use an online brokerage app or website to sell the stock. Naturally, if you sell the stock for more than you paid, you will have made a profit. Otherwise, you will have no return or a loss.
Stock Transactions and Your Taxes
If you hold on to stock for a year or more and then sell it for a profit, that counts for federal income tax purposes as a long-term capital gain. If you sell stock after owning it for less than a year, then it's considered a short-term capital gain. If you sell stock at a loss, you have a long-term or short-term capital loss, depending on how long you have owned the stock.
Long-term capital gains are usually taxed at a lower rate than ordinary income, such as income you earn from work or interest on bank accounts, with most taxpayers paying a 15 percent tax rate on such gains. Some taxpayers pay 20 percent and some pay 0 percent, depending on their overall tax brackets. Short-term capital gains are simply taxed at the ordinary income rate.
This is a factor you may wish to consider when you're deciding whether to buy or sell stock at a particular time. Holding on to stock for longer may reduce your taxes if you haven't yet held it for a year, but they may be offset by changes in the stock price between now and then. Capital losses can offset capital gains on your taxes, and they can often be rolled into future tax years, although they can't be rolled back into previous tax years. That may also incentivize you to consider timing your sales of profitable and unprofitable stock to minimize your tax burden.
If you sell stock short, even if you take more than a year to repurchase the shares and return them, any profits you make are considered to be short-term gains. That means you will pay the ordinary income rate, usually higher than the long-term capital gains rate, on any profit you make.
Having a Balanced Portfolio
Many investors strive to maintain a balanced, diversified portfolio including various types of investments, such as stocks in different sorts of companies, interest-bearing investments like bonds and certificates of deposit and perhaps holdings in real estate or collectibles. This can help reduce risk since certain investments might do well when others falter, and can expose you to gains in any of your disparate investments.
While short selling Cramer picks might be a good way to make some quick money if it pans out, it is unlikely to be the centerpiece of your investment strategy. Consider other investments as well to make money in the long term.