A Guide to Short Selling

Everything you need to know before placing a short

Nov 14 2022

In the stock market you can profit not only from price going up, but also from price going down. Here is everything that is important to know just before you click on a short order in your trading platform

Why should you buy a short position?

When we believe that the price of a certain property is going to fall, and want to make a profit from it, we sell short. If the price of the property does go down, we will buy it back - and earn the difference between the selling price and the buying price

How is the operation carried out?

There is a procedure that takes place behind the scenes to allow short selling. When we sell paper short, we have to borrow the paper from an entity that holds it. Otherwise, we will create a quantity of shares that does not exist - which in practice is not possible. Therefore, before making a short sale, make sure that the paper can be borrowed.

What are the expenses associated with short selling?

As with any trading operation, here too, it is important to check what the costs are - and whether they affect the viability of this type of trading. Because unlike buying long, selling short has an additional cost, which is the loan fee. As mentioned, we need to borrow the paper from a third party, and for that question we will pay the loan fee. The amount of the loan fees varies depending on the supply and demand for that paper. For example, at the height of the period of declines in Tesla stock, the loan fees in annual terms jumped from levels of 1% to levels of 450%, due to the high demand for borrowing Tesla shares. Therefore, before we make a short sale, it is worth checking carefully the level of the borrowing cost.

Are there any other ways to present a short?

There is another and simpler option for short selling - using short index tracking products. In other words, you can buy funds that behave the opposite of the reference index. For example, if we buy ProShares UltraPro Short QQQ ETF (SQQQ), when the index goes down we will profit, but when the index goes up - we will lose. The advantage of these products is their simplicity, which makes them particularly suitable for traders who are at the beginning of their journey, or for traders who wish to short an entire index, and not just Single property.

What about the risk?

Finally, trading activity on the stock market always involves a certain level of risk - a parameter that is important to take into account. Unlike a long position, in a short sale the loss is unlimited, for the simple reason that the security can increase endlessly and therefore, if you chose to go short, you should use trigger orders - which will limit the amount of the loss.

Short Trading

Shai.Gal

Shai Gal is a highly experienced financial journalist with expertise in the tech industry and dividend growth stocks. He has a strong track record of producing insightful content that helps investors make informed decisions. Shai is skilled in conducting in-depth research and analysis to identify trends and opportunities in the market.

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Please note that the article should not be considered as investment advice or marketing, and it does not take into account the personal data and requirements of any individual. It is not a substitute for the reader's own judgment, and it should not be considered as advice or recommendation for buying or selling any securities or financial products.