Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Can We Lock Up Rachel Maddow Now? - 25th Mar 19
Real US National Debt Might Be $230 Trillion - 25th Mar 19
Friday's Stock Market Sell-Off - New Downtrend or Just Correction? - 25th Mar 19
20 Days Left to Find Buying Opportunities In Gold - 25th Mar 19
Will the Historic Imbalance in Gold Stocks to Gold Price Resolve ? - 25th Mar 19
EasySMX Wireless Games Controllers Review - 25th Mar 19
Stock Market Short-term Top - 25th Mar 19
UK Population Growth - Latest ONS Immigration Statistics and Consequences - 24th Mar 19
The Fed Follows Trump's Tweets, And Does The Right Thing - 24th Mar 19
Yield Curves, 2yr Yield, SPX Stocks and a Crack Up Boom? - 24th Mar 19
Risk/Reward in Silver Favors Buying Now, Not Waiting for Big Moves - 23rd Mar 19
Similarities Between Stock Market Today and Previous Bull Market Tops - 23rd Mar 19
Stock Market DOW Seasonal Trend Analysis - 23rd Mar 19
US Dollar Breakdown on Fed Was Much Worse Than It Looks - 23rd Mar 19
Gold Mid-Tier GDXJ Stocks Fundamentals - 23rd Mar 19
Which Currency Pairs Stand to Benefit from Prevailing Risk Aversion? - 23rd Mar 19
If You Get These 3 Things Right, You’ll Never Have to Worry About Money - 22nd Mar 19
March 2019 Cryptocurrency Technical Analysis - 22nd Mar 19
Turkey Tourist Fakes Market Bargains Haggling Top Tips - 22nd Mar 19
Next Recession: Finding A 48% Yield Amid The Ruins - 22nd Mar 19
Your Future Stock Returns Might Unpleasantly Surprise You - 22nd Mar 19
Fed Acknowledges “Recession Risks”. Run for the Hills! - 22nd Mar 19
Will Bridging Loans Grow in Demand and Usage in 2019? - 22nd Mar 19
Does Fed Know Something Gold Investors Do Not Know? - 21st Mar 19
Gold …Some Confirmations to Watch For - 21st Mar 19
UKIP No Longer About BrExit, Becomes BNP 2.0, Muslim Hate Party - 21st Mar 19
A Message to the Gold Bulls: Relying on the CoT Gives You A False Sense of Security - 20th Mar 19
The Secret to Funding a Green New Deal - 20th Mar 19
Vietnam, Part I: Colonialism and National Liberation - 20th Mar 19
Will the Fed Cut its Interest Rate Forecast, Pushing Gold Higher? - 20th Mar 19
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

Short Selling - The Worst Trade You Can Make

InvestorEducation / Learning to Invest Dec 02, 2013 - 05:35 PM GMT

By: Investment_U

InvestorEducation

Alexander Green writes: Last week, The Wall Street Journal ran an article titled “Tough Year for Short Sellers.”

I’ll say…

Short sellers bet that stocks will fall rather than rise. You already know, for instance, that if you buy a stock at $20 and sell it at $25, you make $5 a share. But if you short a stock at $25 and buy it back at $20, you also make $5 a share. However, this has been an awfully difficult game to play this year.


Sure, there have been individual stocks that have cratered, like fallen tech star BlackBerry (Nasdaq: BBRY) and struggling developer The St. Joe Company (NYSE: JOE). But these are the exceptions.

The Dow is up 23% year-to-date. The S&P 500 is up 27%. And the Nasdaq is up 33%. (Ouch.) Historically, four out of five stocks follow the broad market trend.

Against the Tide

Shorting stocks in a market like this one can make you feel like you are shoveling sand against the tide. (And spending your time about as fruitfully.) Short sellers have had their heads handed to them.

As a result, fewer investors are wagering against stocks. There are only 25 hedge funds left that are pure short vehicles. Virtually all of them are posting serious negative returns.

There are another 3,700 hedge funds that follow a long-short strategy – going long some stocks and short others – but their returns, while better than the pure short funds, aren’t making shareholders shout “Hallelujah!” either.

Short selling is risky for two primary reasons. No. 1, history shows the stock market spends most of its time going up. Yes, bear markets are nasty and can send the indexes down 20% or more in a hurry.

But bear markets are sudden, unexpected and short-lived. The average bear market lasts less than 18 months. The average bull market, by comparison, lasts over two years and often considerably longer. The historic bull market of the ‘90s, for instance, lasted nine years.

The No. 2 risk of short selling is the downside. It’s unlimited. If you’re long on a stock, it cannot go lower than zero, handing you a 100% loss. But if you’re short on a stock, there is no limit to how high it (or your losses) might go.

For instance, if you short a stock at $10 and it goes to $20, you are down $10 a share (or 100%). But if it goes to $30, you are down 200%, to $40 and you are down 300%… and so on. That is why it is crucial for any short seller to use “buy stops” to strictly limit downside risk.

However, there is still another risk to short selling that is seldom recognized and somewhat counterintuitive…

Hidden Risk

In a down market, the stocks that drop the most are the worst companies with the poorest fundamentals. But you have to take a closer look to see how they actually get to the bottom.

Perversely, the stocks that rise the most in a sudden rally are often the worst ones. Why? Because just as most traders gravitate toward the best stocks, most short sellers bet against the same bad ones. Then when the market rallies – as it is wont to do from time to time even in a bear market – short sellers all rush for the exits, or “buy to cover,” driving these lousy shares up more than the market averages.

Because it is sensible to use buy stops for protection, it is much easier to get stopped out of a short position than a long one. And it is safer and more profitable to make money on the long side. After all, while there is no limit to how high a stock can go, it can only fall 100%. So a short seller actually has limited profit potential with unlimited downside risk.

In sum, short selling is for pros. And with the dusting up they have taken recently, this isn’t likely to be a very merry Christmas for them this year either.

Good investing,

Alex

Editor’s Note: Time’s running out to sign up for The Oxford Club’s free tax webinar, which will take place tomorrow. With tax season almost upon us, now is the time to learn about some of the most sophisticated (and legal) tax mitigation strategies that I’ve seen. Click here for more information.

- Andrew Snyder

Source: http://www.investmentu.com/2013/December/short-selling-worst-trade-you-can-make.html

http://www.investmentu.com

Copyright © 1999 - 2013 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email: CustomerService@InvestmentU.com

Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Investment U Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules