Thoughts On Short Selling?

Discussion in 'Stock Market Education' started by Rainman, Aug 4, 2015.

  1. Rainman

    Rainman Senior Investor

    Joined:
    Jun 2014
    Posts:
    1,587
    Likes Received:
    4
    I've heard that some investors, those who've been trading for a while, make some fast profits from short selling. However, considering the fact that stock prices could go up any time before you sell, in the event that it does actually end up being so, you'd lose a substantial amount of money.

    Question: is short selling so risky that it should be avoided unless you are certain that the prices of the stocks you intend to buy will decline? Or would this be a great way for beginners to make fast profits?
     
  2. JR Ewing

    JR Ewing Super Moderator Staff Member

    Joined:
    Feb 2014
    Posts:
    4,950
    Likes Received:
    39
    You can't ever be "certain", particularly in the short term.

    I wouldn't recommend it for beginners, particularly if you have a limited amount of money.

    If you ever get to the point where you feel like you're ready to try to profit on the downside, I'd suggest that you consider using put options instead of actual short stock positions, at least when it comes to the more volatile, high-beta stocks that move a great deal in either direction.

    It's better to limit any actual short stock positions to the bigger, lumbering, less volatile companies that are lower in beta and appear overpriced. I recently profited from shorting GM and GE when they temporarily jumped up more than they'd moved in many years - I was confident that they became overpriced, and would soon return closer to where they'd been trading previously. GM continued lower than they'd been previously, in fact.

    When it comes to companies like Netflix, Amazon, Tesla, and many other tech, biotech, and energy names, shorting can be dangerous. Better to use put options - either to protect a long stock position, or purely as a bet against them.
     
  3. JessieJ

    JessieJ Guest

    Joined:
    Aug 2015
    Posts:
    96
    Likes Received:
    1
    I recommend short sell for beginners. It's better for them because they are new to the game. It will help them in the long run and help them make fast money.
     
  4. JR Ewing

    JR Ewing Super Moderator Staff Member

    Joined:
    Feb 2014
    Posts:
    4,950
    Likes Received:
    39
    I strongly disagree. Beginners have no business trying to make "fast money". The reason shorting is so dangerous is because the downside risk in short positions is theoretically unlimited, while the upside potential is limited - a stock can go UP an infinite amount, but can only go down to zero.

    Also, the markets in general have an upside bias - at least over the long haul. Most investors are "long only" investors, and the companies that make it into the S&P 500, Dow 30, NASDAQ, Russell, etc and stay there are generally the better companies - and better companies in general go up over time.
     
  5. crimsonghost747

    crimsonghost747 Senior Investor

    Joined:
    Mar 2014
    Posts:
    1,722
    Likes Received:
    6
    I use short selling extremely rarely. There are two situations when I consider it.
    1. I have a really strong belief that a company is overvalued in the short term. So I might short their stock for a quick profit: so liquidating that short position in a matter of days / weeks. This is of course risky and I only do this with really small amounts. And rarely.
    2. Shorting an index to protect against a market downturn. Simply a way to protect my portfolio without selling my shares and taking on the tax burden. So this is a way to reduce risk in certain situations.

    As JR put it very well, in general the direction of the market is up over a long period of time. So shorting is quite a dangerous game to play as statistically your chances of profiting from it are less than when buying long.
     
  6. MNyte

    MNyte Member

    Joined:
    Aug 2015
    Posts:
    21
    Likes Received:
    0
    Short selling is bad for beginners - you must know the stock, the type of people that buy, what it actually sells, and how the company operates. You may loose a lot of money on just short selling a stock you are unaware of - calculating and making what you feel is a correct short stock investment is always the way to go.
     
  7. JR Ewing

    JR Ewing Super Moderator Staff Member

    Joined:
    Feb 2014
    Posts:
    4,950
    Likes Received:
    39
    Because of the general upward bias of the market, and the theoretically unlimited downside risk with short positions, you should generally have most of your investment dollars in long positions. If you have say $100k or more, and 30 positions in your portfolio, I'd say generally no more than 5-6 should be short / put positions. Of course you might have puts covering some of your more volatile long positions if you've got say 6 figures or more you're playing with...

    But if you've just got a few hundred or a few thousand dollars, you'd probably just want to stick to long-only, buy & hold for the time being.
     

Share This Page