Short Selling

What is Short Selling?

Short selling is a method that is becoming more and more popular these days. It can allow traders to make good profits but also may lead to significant losses. Short selling is a pretty basic concept. Short sellers assume that the stock they are playing with will drop in price. So the trader will sell the stock at the current price, then the short seller repurchases it at a lesser price and returns it to the broker. The difference between the selling price and the buying price is the profit for the trader.

An example of short selling by Investopedia.com

For example, if an investor thinks that Tesla's (TSLA) stock is overvalued at $625 per share and is going to drop in price, the investor may "borrow" 10 shares of TSLA from their broker, who then sells it for the current market price of $625. If the stock goes down to $500, the investor could repurchase the ten shares at this price, return the shares to their broker, and net a profit of $1,250 ($6,250 - $5,000). However, if the TSLA price rises to $700, the investor would lose $750 ($6,250 - $7,000).

Significant Risks Come with Short Selling

When it comes to Short selling, there is a possibility for infinite losses. When you trade stocks typically, you can only lose the money that you put into the equities. So if you put in 1500$ in Tesla, you can only lose $1500 max. However, if you wanted to sell Tesla short and the prices keep increasing, you will keep losing more and more money.

When Does Short Selling Make Sense?

Realistically speaking, short selling only makes sense during a bear(declining) market. This is the case because many stocks tend to decrease in price during such times. However, if an investor is confident that a price will drop, it is also an excellent bet to short sell the stock. It is crucial to keep in mind that advanced or intermediate traders should only use short selling due to its potential downsides. Also, for those who can, now is the perfect time for short-selling stocks due to the global pandemic. If COVID-19 has brought us anything good, it is the ability to short sell.

How an Investor Makes Money Short Selling Stocks. https://www.investopedia.com/ask/answers/how-does-one-make-money-short-selling/

Please keep in mind that this is strictly my analysis and opinion. Financial actions should not be based solely upon the opinions of this one article. Please read my disclaimer for further information. For further information on this topic, I recommend going to investopedia.com