Sunday, August 7

Buy long, sell short

Selling short is often a risky trading practice. Some traders prefer to trade long

The day traders buy stocks expecting their prices to rise. This is called buying long, or just long. When a trader says “I am long 100 AAPL shares” it means that he has bought 100 shares of Apple and would like to sell them more expensive to generate a certain profit. Buying long is good when the price is expected to go up.

This is how Andrew Aziz relates it in his book How to make a living from day trading (Valor Editions).

Make a profit despite the price drop

But, What if prices go down? Then, you can sell short and still make a profit. Day traders can borrow shares from their broker and sell them in the hope that their price will drop so that they can buy them at a lower price to make a profit.

According to Aziz, this is called selling short, or simply short. When someone says, “I’m shorting Apple,” it means that they have shorted Apple stock expecting its price to decline.

“When the price keeps going down, you owe 100 shares to your broker (probably reflected as –100 shares in your account), this means that you must return 100 shares of Apple to your broker. Your broker does not want your money, what he wants is to get his shares back »points out this trader.

So if the price has dropped further, you can buy the stock at a lower price than you sold it and make a profit. Imagine you ask your broker for 100 Apple shares and sell them for $ 100 each.

Apple’s share price then drops to $ 90, so you can buy 100 shares at that price and return them to your broker. You will have made a profit of $ 10 per share, which is equal to $ 1,000.

What if the stock goes up?

What happens if Apple’s share price rises to $ 110? In this case you are still obliged to buy 100 shares to return them to your broker, since you owe him titles instead of money. Therefore, you will have to buy 100 shares at $ 110 and you will have lost $ 1,000.

Short sellers benefit when the price of the security they borrowed to sell falls. According to Aziz, “Selling short is important because stock prices regularly fall much faster than they rise..

Fear is a more powerful feeling than greed. So short sellers, when they get it right, can achieve staggering returns, while other traders panic and start selling their stocks. “

Risks of investing short

However, like everything that shows great potential in the market, short selling has its risks. When you buy shares in a company at $ 5, the worst case scenario is that the company goes bankrupt and you lose $ 5 per share.

There is a limit to your loss . But if you short sell a company’s stock at $ 5 and its price starts to rise and rise instead of falling, then there will be no limit to what you can lose.

The Price can go up to $ 10, $ 20, or $ 100 and still have no limit to what you can lose. Your broker wants your shares back. Not only can you end up losing all the money in your account, but your broker can sue you if you don’t have enough funds to cover your short sales.

A legal activity

Selling short is a legal activityfor several good reasons. First, provides markets with more information . Short sellers conduct legitimate and in-depth research to uncover facts and failures that support their suspicions that the companies they have chosen are overvalued.

If there were no short sellers, the stock price could unduly rise endlessly.

The short sellers bring an equilibrium to the marketand they help to adjust prices to a reasonable value. Your actions contribute to the health of the market.

If the price is going to go down, you might rightly wonder why your broker is allowing you to sell short instead of selling the securities themselves before the price drops.

The answer is that your broker prefers to keep its long position. Selling short gives investors (with long positions) who own the securities the ability to generate additional income by lending their shares to sellers short.

In exchange for lending their shares, long-term investors charge interest. But if you short the same day, you don’t have to pay.

Selling short is often a risky trading practice. Some traders prefer to trade long. They only buy shares hoping to sell them more expensive.

“I have no preference,” says the author of How to live from day trading. “I short when I think the pattern is mature and I buy when I think it fits with my strategy. That being clarified, I must say that I am more cautious when short selling.