Shorting stocks


#1

I understand one of Freetrade’s mantra is to encourage long term investing but, are there any plans to offer this service?

According to many market commentators, a recession is looming within the next couple of years and with the last recession wiping out nearly 50% off the S&P 500, perhaps, some customers will like this service.

Interested to hear feedback from Freetrade and other future users.


#2

I thing Short selling should be an important service for any kind of brokerage firm


(Dave Smith) #3

A recession has been looming in the next couple of years for about 7 or 8 years now :smiley:

Personally I don’t think shorting is a big priority, I don’t think my HL account offers shorting except maybe through some inverse ETFs. My IG account does offer shorting


#4

Be that as it may, have a look at these interesting articles.

The concern is that during a recession when the majority of equities and indices are negatively affected and you are not able to short, your customers of a trading platform will be losing money. And, will most likely switch to platforms where you can go short.

If we are to believe the recession is within the next couple of years, the timing of Freetrade growing isn’t exactly ideal.

https://www.forbes.com/sites/jessecolombo/2018/09/10/why-americas-sub-4-unemployment-rate-means-a-recession-is-not-far-off/#48ae8532cb3e

https://www.forbes.com/sites/jessecolombo/2018/09/10/why-americas-sub-4-unemployment-rate-means-a-recession-is-not-far-off/#48ae8532cb3e


#5

https://www.forbes.com/sites/jessecolombo/2018/09/05/disaster-is-inevitable-when-americas-stock-market-bubble-bursts/#7fef0eac1b82


(Vladislav Kozub) #6

If the market is doubtful and expecting a crash or a recession, it is already priced in, hence the crash is less likely to happen.

The reasons for recessions and market collapses are due to no one expecting anything and someone digging out something that sets everything on fire. Therefore, if many “analysts” have a consensus for a bear market, investors will sell before that, meaning the recession will be avoided by having a correction instead (the most recent big one was in late January 2018 with the market being down 15%).

And of course, people have been predicting a crash for eight years now. A legion of analysts were extremely confident that it was going to happen in 2015, some think it is happening right now. And yet, we are up 25% since 2015.

Look at 2008, for example, it did not “crash” on its own. The subprime mortgage crisis took major banks down before stock selling was triggered, and further reductions were then triggered by “stop loss” that kept selling investors’ holdings automatically, reaching new bottom until 2009 and resulting in about 50% overall loss over the course of the crisis.

TLDR: The risk of a crash is always priced in by more sophisticated investors. When you expect it - it will unlikely happen. Time in the market in most cases beats timing the market.


Freetrade articulated that neither margin trading (which is what you do when shorting the stocks you do not own) nor options are on the roadmap at the moment hence we cannot expect these at any time soon. I would personally hope to have options one day, but these are the instruments that could lead to 100% (and more!) losses unless are being thoroughly understood and will only be relevant to a fraction of Freetrade’s target market.

At the moment, Freetrade is creating a product that will help all of its users to accumulate wealth over decades, rather than getting it quickly.

And responding to the actual topic now (:sweat_smile:), I personally would not deem shorting as a hedge. If the recession does not happen - an individual will lose on shorts. If it does - an individual will most likely lose more on their holdings’ value reduction than they will compensate by shorting.

The solution for hedging would be to reevaluate the risk tolerance and see if there are other products in the market (bonds, savings account, gilts) that would be more appealing than stocks.


Stock Market PEAKED
(Dave Smith) #7

They can lead to more than 100% losses, shorting a stock your losses are effectively unlimited. If there’s a proper short squeeze even a stop loss might not save you


(Vladislav Kozub) #8

A very good point, Dave, thank you!


#9

So no short on stocks but what about ETF short ??