Short selling (chat)

This conversation got started when @CEY mentioned shorting Tesla -

& @ytsruh said

For anyone who’s not familiar with short selling, Investopedia has a reasonably good explanation -

Freetrade consider short selling to be a form of leverage so we’ve decided not to offer this service but you can vote for the idea here: Short selling

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I admire the art of shortening stocks – trying to read a lot and learning as much as I can — Well done !!

Opening yourself to a house of pain in my opinion. Don’t get me wrong, you get 2 or 3 opportunities a year to do it but fundamentally it’s counter-intuitive. Sometimes you’ll find a dead ringer (Debenhams this year for example) and it will just scream it but most of the time you really are guessing & guessing on the downside is a quick way of going bankrupt

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Shorting a stock you can get a short squeeze, where there aren’t enough shares on the open market for the shorts to buy to close their short position. This happend with Volkswagen shares a few years back because the share price was declining until Porsche suddenly decided to try and buy Volkswagen and bought most of the available shares. The price went through the roof and loads of shorts got wiped out.

Could happen with Tesla if you think about it. I don’t think they are quite low enough for another car company to swoop in yet though

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I know we are all here to make money and have fun but I am mainly here to learn and have fun and ‘play’ with ‘small’ amounts here and there. But really as of right now I am interested in the theory behind it that goes beyond guessing. I recently saw the movie ‘The Big Short’ where its about the 2008 housing crisis and the shortening of stocks. I was fascinated by the fact some predicted this and I admire everyone who has the knowledge to do such things.

@Dave I am completely aware of all the risks and all those crazy multipliers when one decides to shorten stocks. Again this is really for me a mix if curiosity and willingness to learn more. Who know one day I take my chance but you can be assured I won’t be using my life savings for that.

If anyone has a good source for ‘dummies’ to learn about shortening stocks please share !

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@Freetrade_Team1 Cheers for the split

@CEY I appreciate what you’re trying to do but I’d still say stay clear. If you’re open to gambling then I’d treat it at such and I would keep the idea of you investing & shorting very separate. You have to remember that shorting is a type of risk management (hedge) and is used in most cases to hedge against potential losses on riskier investments. You hear stories about people making short term gain off it (my Tesla & Debenhams calls for example) but thats not what it should really be used for. To this day, I’ve still lost far more in shorting than I have gained - to the tune of about 4X. Admittedly myt losses where in the early years when I was more liberal with it, but still, losses are losses.

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I guess it boils down what the ethos of FreeTrade is.

If I want to do more risky investments I can go to Coinbase and the likes for crypto, or eToro for CFD trading.

I was under the impression that FreeTrade is attempting to engender more longer-term investing and to make stock trading more accessible to the masses, without convoluting the message with lots of exotic mechanisms like short-selling.

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In most circumstances I don’t believe in shorting stocks, the ability to bet on other people losing money makes me feel uneasy so I think Freetrade should stay away…

Freetrader is against it as far as I know. This convo just started off the back of me opportunistically selling Tesla. I doubt you will ever see this kind of service from Freetrader, nor would I want to either - as I said above it amounts to gambling, not investing

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Ah, I misunderstood the purpose of this thread then. Sorry.

I’ve requested a few inverse market index ETF’s that once available will be a way to hedge against the major indexes falling. It’s not “shorting” in the true sense of the word, but it is a way of flipping market drops into a positive rise in the value of the shares for these ETF’s. There are quite a few of these Inverse ETF’s around these days and they are available for most of the major markets.

Matt

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An example of an S&P500 Inverse ETF

Matt

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If you long a stock your downside is capped at 0 and your upside is theoretically unlimited. If you short then your loss is theoretically unlimited. Sure you can set stop losses but when market gaps you might not be able to get out.

There is also an ongoing cost with shorting a stock as you’re actually paying to borrow a stock because you cannot short naked. So then if price goes up/down 50% of the time, you’re worse off going short.

The other way is to short through derivatives ie CFDs or inverse ETF so now you’re adding another layer of risk. You’re leveraged up with CFDs. (At least some) Inverse ETFs are intended only for very sophisticated investors and i would proceed with extreme caution.

Example: Shorting the VIX (volatility index) was an extremely popular trade for years in the Hedge Fund community (and retail investors at some point). If i remember it correctly, it was triggered only by a sub 5% move in equities. But because so much money was locked in shorting, people get short squeezed and the panic snowballed. Volatility went through the roof. Credit Suisse at the time had one of most popular Inverse VIX ETFs and in the small print it says they had the right to liquidate/accelerate the fund if the market value suffered more than 80 or 90%. You wouldn’t have this with a long only ETF because there is no real incentive for that ETF to liquidate. But with an inverse ETF, they want to shut down the fund because the downside could continue to infinity.

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I don’t short stocks longterm but I ride their decline, once I have hit my target I set a trailing stop loss. As always people should make sure they manage their risk

If you bet on Amazon retail long term you’re basically betting on them taking more business away from high street stores

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Each to their own, but for those of us that start to feel a bit uneasy when we look at the currently high company valuations and their associated stretched ratio’s, it’s nice to have the option to try to remain in the markets whilst also hanging onto the gains that we have made. We’re all happy to play the markets when they are going up, and for some of us it’s also useful if we can try to play the markets as they are going back down again.

As the markets start to flatten out and fall, some will stay in, some will go back to cash, some will hedge, and some will short. We’re all different and regardless of how each of us want to manage these rises and dips in the markets, it’s just nice to have the options available to choose from.

I try my best not to destroy the value of some of my other assets by not crashing my car or burning my house down, but I still buy insurance each year to protect myself just in case. The value of my portfolio is just another asset that I’m looking to protect over the short, medium & long term.

Matt