How Short-Selling Works
- May 7, 2021
- Will Turner
One of the most outspoken advocates of short-selling stocks is Doug Casey. He believes short-selling is the best way to take advantage of the emotional volatility of a major market swing. I am not convinced that is true, and the longer term price action in any stock is probably far more important to the long-term success of a short-seller than what the stock price is doing in one particular day. However, short-selling does work because when a stock jumps more than 40%, many investors take profits. That means a large amount of stock that was essentially out of favor has sold off.
Is Short-Selling the Right Strategy?
To be honest, short-selling is almost never the right strategy for long-term investing, but just like the strategy you apply to betting on new casinos, you expect to “win” more trades than those you lose. Many investors find it easier to limit their risk by owning low-priced stocks. In general, it is much easier to go long on a stock that is not too expensive than it is to go short. When you go long, you have to pay to own that stock, and a huge amount of emotional volatility can appear out of nowhere.
I think it is much more important to choose a stock that is attractively priced. If the stock price spikes significantly, so much the better because it means that the stock has dropped to a fairly low price. In that case, you are going to buy that stock at a steep discount. In the end, that is probably the best way to increase your profits and your wealth.
Therefore, you have to have a very good reason to short-sell a stock. If you have no good reason, then you might as well just buy a lot of stocks that have gotten beaten up lately and wait for a buying opportunity.
Based On the Facts, It Seems Like The Market is Going Down
Why is the market going down? It seems like a pretty straightforward issue. When stocks are going down, the fear factor goes up. At the same time, stocks that are falling are sometimes acting like it is an opportunity for some short-sellers.
Of course, when stocks are going down, some investors prefer to stay out of the stock market entirely. That makes sense because if you had a trading strategy based on the fact that stocks were going down, you might as well have stayed out of the market and avoided all the ups and downs.
Last week, the stock market went down a bit. There was no major correction, but there was a fairly significant downturn. When I went to bed last night, I was concerned that stocks might go down more than they did. At that point, I wrote an article in Forbes about my concerns.
It appears as though the market is getting much worse. Even though I had been worrying about it, the stock market seemed to ignore my concerns. My worries seemed to be ignored and now the market is starting to fall dramatically. I don’t know how much worse it is going to go, but I will share my concerns with you.
Many people have been worried about this market for months. They feel that the stock market is going to crash badly. Now, they think that it has gone too far.