Short selling is a controversial investment technique. Some people have been able to make enormous amounts of money by short selling the right commodity or stock, but other experienced investors will tell you to stay well away from shorting altogether. Should you short sell or not? Let’s take a look.
What Is Short Selling?
Even if you know nothing about trading stocks and shares, you probably understand the idea when trading stocks is to sell them for a higher price than you buy them. In general, it is better for an investor when the value of the business that they have invested in increases in value. However, the value of a stock or share can just as easily go down as up. What’s more, investors and business analysts can predict whether a stock is likely to sour and decrease in value in just the same way that they can predict if a stock is likely to increase in value.
If an investor foresees a stock’s value plummeting, they can use short selling to take advantage of the situation. Short selling enables investors to make money when the value of a stock goes down instead of up.
What Are The Risks?
The risks of short selling mirror those of regular trading. If you are buying a stock in the hope that it will increase in value, enabling you to sell it for a higher price later on, you run the risk of it actually going down in value. Similarly, short-sellers who are banking on the stocks they short going down in value have to contend with the risk that they will actually mature and gain in value.
However, there are also some risks that are unique to short-selling, and it is these risks that lead some people to declare short selling a universally bad idea. When you invest in regular stock, the only money that you stand to lose is the money that you have spent on those stocks. With short-selling, your theoretical losses are infinite.
Because the potential losses of short-selling are so great, it is essential that you don’t start short selling until you are familiar with regular trading. Start with a beginner’s guide to trading shares and work your way up from there.
Why Do Investors Short?
Short-selling is usually reserved for investors who are speculating or hedging. If they have specific reasons to expect that a particular stock or commodity is about to take a beating, then investors can capitalize on the situation by short selling. Short selling isn’t just a technique for stocks; investors can also short forex markets as well.
Short selling is a risky strategy. It isn’t something for new investors or for those who only have limited funds to work with. If you do decide to try short selling, it is vital to remember that you could potentially lose more money than you are investing. You should make sure that you have a cushion in place to protect your finances if you do make losses from short selling.