Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21
Bitcoin Halvings Price Forecast and Stock to Flow Analysis - 18th Jul 21
Dell S3220DGF Unboxing and Stand Assembly - 32 Inch 165hz Curved Gaming Monitor Amazon Discount - 18th Jul 21
What Does The Fed Mean By “Transitory Inflation” And Why Is It Important To Understand? - 18th Jul 21
Will the US stock market’s worsening breadth matter? - 18th Jul 21
Bitcoin Halving's Price Projection Forecasts Trend Trajectory - 18th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Short Selling - The Worst Trade You Can Make

InvestorEducation / Learning to Invest Dec 02, 2013 - 05:35 PM GMT

By: Investment_U

InvestorEducation

Alexander Green writes: Last week, The Wall Street Journal ran an article titled “Tough Year for Short Sellers.”

I’ll say…

Short sellers bet that stocks will fall rather than rise. You already know, for instance, that if you buy a stock at $20 and sell it at $25, you make $5 a share. But if you short a stock at $25 and buy it back at $20, you also make $5 a share. However, this has been an awfully difficult game to play this year.


Sure, there have been individual stocks that have cratered, like fallen tech star BlackBerry (Nasdaq: BBRY) and struggling developer The St. Joe Company (NYSE: JOE). But these are the exceptions.

The Dow is up 23% year-to-date. The S&P 500 is up 27%. And the Nasdaq is up 33%. (Ouch.) Historically, four out of five stocks follow the broad market trend.

Against the Tide

Shorting stocks in a market like this one can make you feel like you are shoveling sand against the tide. (And spending your time about as fruitfully.) Short sellers have had their heads handed to them.

As a result, fewer investors are wagering against stocks. There are only 25 hedge funds left that are pure short vehicles. Virtually all of them are posting serious negative returns.

There are another 3,700 hedge funds that follow a long-short strategy – going long some stocks and short others – but their returns, while better than the pure short funds, aren’t making shareholders shout “Hallelujah!” either.

Short selling is risky for two primary reasons. No. 1, history shows the stock market spends most of its time going up. Yes, bear markets are nasty and can send the indexes down 20% or more in a hurry.

But bear markets are sudden, unexpected and short-lived. The average bear market lasts less than 18 months. The average bull market, by comparison, lasts over two years and often considerably longer. The historic bull market of the ‘90s, for instance, lasted nine years.

The No. 2 risk of short selling is the downside. It’s unlimited. If you’re long on a stock, it cannot go lower than zero, handing you a 100% loss. But if you’re short on a stock, there is no limit to how high it (or your losses) might go.

For instance, if you short a stock at $10 and it goes to $20, you are down $10 a share (or 100%). But if it goes to $30, you are down 200%, to $40 and you are down 300%… and so on. That is why it is crucial for any short seller to use “buy stops” to strictly limit downside risk.

However, there is still another risk to short selling that is seldom recognized and somewhat counterintuitive…

Hidden Risk

In a down market, the stocks that drop the most are the worst companies with the poorest fundamentals. But you have to take a closer look to see how they actually get to the bottom.

Perversely, the stocks that rise the most in a sudden rally are often the worst ones. Why? Because just as most traders gravitate toward the best stocks, most short sellers bet against the same bad ones. Then when the market rallies – as it is wont to do from time to time even in a bear market – short sellers all rush for the exits, or “buy to cover,” driving these lousy shares up more than the market averages.

Because it is sensible to use buy stops for protection, it is much easier to get stopped out of a short position than a long one. And it is safer and more profitable to make money on the long side. After all, while there is no limit to how high a stock can go, it can only fall 100%. So a short seller actually has limited profit potential with unlimited downside risk.

In sum, short selling is for pros. And with the dusting up they have taken recently, this isn’t likely to be a very merry Christmas for them this year either.

Good investing,

Alex

Editor’s Note: Time’s running out to sign up for The Oxford Club’s free tax webinar, which will take place tomorrow. With tax season almost upon us, now is the time to learn about some of the most sophisticated (and legal) tax mitigation strategies that I’ve seen. Click here for more information.

- Andrew Snyder

Source: http://www.investmentu.com/2013/December/short-selling-worst-trade-you-can-make.html

http://www.investmentu.com

Copyright © 1999 - 2013 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email: CustomerService@InvestmentU.com

Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Investment U Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in