Pros and cons of selling short:

by Kavish Dodwani I am Digital Marketer

Any fans of the big short? Yes?

Don’t copy the movie and bet on a market’s downfall straight away. Or what if you could?

The big short is based on a guy who bets a huge sum of money on the downfall of the market. To keep it in trading terms, the guy goes short against the market. The bet here is that the market will fall, not rise. I wouldn’t really like when the market would fall but I was to trade in a falling market, I would make my bets on what limit could be the deepest in the terms of the plunge it takes.

That is what going short is. Making the bets on the fact how deep will the market plunge. It can go wrong and it can go wrong horrendously. It can go in the correct order and it can make you a millionaire too. 

Let us look at some facts about short selling and the advantages and disadvantages of the same.

What is selling short? 

Selling short or going short is trading or an investment strategy that works around speculation on how far can a stock decline. This can be for a stock or any other instrument. It has to be kept in mind that this is a trading strategy that is advanced and should always be used by experienced traders.

In short selling, the position is opened by borrowing, not owning the shares of a particular stock that the investor believes will fall in its intrinsic value. 

The investor then goes ahead and sells these stocks to the buyers who are willing to pay the current market price. The trader is betting that the price will continue to fall before it becomes mandatory that the borrowed shares have to be bought. Then, the purchase can happen at a lower price.

 If we go by theory then the risk in selling short is close to infinity and not closer to zero in any case. The rules of math are different here in the market. While the market is seeing a downfall, no one can predict for how long will it happen. The stock can see an uptrend and no one will get a whim. If that happens, then going short against the market seems to be a trading blunder. 

How can I short-sell for a profit?

Imagine that there is a stock and a trader believes taht it will fall in the coming months,. The stock is currently trading at  $100. The trader borrows 100 shares of the stock and then sells it to another investor. The trader here is now “short” of 100 shares since he has borrowed those from the broker(say)

Assume that the price does fall. It starts trading at $80. The trader decides to make a profit and closes the position and then buys those 100 shares that he borrowed. The profit is obviously $20 per share here. 

This can be extremely tricky sometimes because the prices can fall or rise at any given time and o one knows when that will happen. The game of short selling is heavily dependent on speculation and correct speculation is heavily dependent o  the correct information. If that is not right, there is no chance the trade goes right. 

What is the best time to go short against a stock? 

Timing is what makes all the difference when it comes to short selling. The stocks have a tendency to decline faster than they pick up. The short-selling trader hence has no time to make the “perfect trade”. Enter the trade a little too late and the opportunity is lost since the major decline already might have happened. Enter the trade too early and it can get harder to golf the position because potential loss can happen with light-speed as the stock sees an uptrend. 

The best time to go short against a stock is the bear market. The traders who go by the philosophy that the trend is the best friend, have an upper hand in making the money via short selling in the bear market as compared to the bull market. Short sellers dwell in an environment where the decline of the market is swift, deep and broad enough. A great example can be the bear market that dominated the globe in 2008-09. 

The pros and cons of going short are limited while the losses can be more than that opf profits. Traders can go short to hedge against other instruments as well. There is also not much initial capital that is required for trading in the short selling market.

The disadvantages are also huge since the market is unpredictable and volatile as well. 

Are you looking for a broker that can cater to all your trading needs? 

We present you the lading online broker HFTrading. The broker has been around the market since 2020  and has also made a lot of noses since then. The broker provides a goliath competition to its competitors by the means of minimum leverage and trading accounts that are hand-tailored for traders of all types. 

Bottom Line:

 Going short can be risky, calculate everything before you go short and also keep in mind that it is not always right to do so. Study the market and make sure that you make the most of it, Make a trading strategy and stick to it. 

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About Kavish Dodwani Freshman   I am Digital Marketer

8 connections, 0 recommendations, 36 honor points.
Joined APSense since, March 27th, 2021, From JAIPUR, India.

Created on Apr 7th 2021 01:02. Viewed 120 times.


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