Hi everyone, here is the sixth post from my series 'Education for new investors'. I will be sharing my knowledge on topics surrounding investing and readers do not require prior financial background to understand the posts.
❓ What is meant by "Short Selling" ❓
The term short selling means that you will open a position at a high price and close the position at a low price. No, I did not make a mistake, as an investor you would speculate (or hope) that the price of the share will go down.
🤷♂️ Does it mean that I make money when the price goes down ? 🤷♂️
Let's say that you open a short selling position of company XYZ at a share price of $100 and that you decide to close the short selling position when the share price is at $80, then you have made $20. Hoorah 🎉
Unfortunately sometimes things don't happen the way we want it to happen. Let's say that you open a short selling position of the same company XYZ at a share price of $100, and that one month later you decide to close the short selling position at a share price of $120, you have lost $20. Bad luck 😥
🤷♂️ Any advise before I try to short a stock ? 🤷♂️
Yes, my first piece of advise is that it can become very costly to short a company as fees can quickly add up. Fees are much higher when you short sell a stock than when you buy a stock.
The second piece of advise is that as a new investor you are looking for bargains and undervalued businesses to buy a piece from so you are not trying to find overvalued business and speculate on the drop of the share price.
My last pointer is that before you open a position (which means that you buy or sell a stock), always make sure that you've selected ‘buy’ or ‘sell’ correctly with what you are meaning to do. Because if the price goes up and you are at loss that means that you have opened a short selling position, and that is a silly way to lose money if you meant to buy the stock.
Personally I do not short sell at all as I have a long term portfolio strategy and I think that short selling is more suited to traders as usually short positions are kept for a maximum of few days only.
These are the top take-away points to know about Short Selling which will benefit new investors.
Also, "The Big Short" film is about someone who tried to predict the 2008 market crash - an interesting film to watch to understand more about the concept of short selling.
If you liked this post, please stay tuned for more posts within the series and feel free to leave a comment in the section below. 👍🏻👍🏻