Taking Advantage on A Bearish Market Through Shorting a Stock
Shorting a stock is a widely accepted investment strategy that traders use to make a profit, especially when prices are heading lower. Also known as going short or short selling, this technique is used to take advantage of expected falling markets and can be used on a variety of assets, not just equity shares. Investors go short when they sell an investment they don’t own. While it sounds a bit complicated, this article will explain how short selling can benefit investors.
Rising in Lows
Shorting a stock, or commonly known as short-selling, is a technique of investors in which they sell the shares they do not own. A broker, or a third party, makes it possible by buying the stock and lending it to investors. The borrower will return the stock when its price falls down to profit from the difference in its original price or will have to buy the stock at a higher price at a loss if price goes up.
Traders have found a great way to rise in lows by making extra money even from a falling market. By shorting a stock, they are able to speculate on stock prices or use it for the less risky hedging purposes.
Short selling as a short-term investment strategy
In many cases, short sellers hold their position for just a short time, which makes this technique especially suitable for day trading. Shorting a stock can be considered a type of derivative trading, such as trading with CFDs, or contracts for difference.
Speculation, meanwhile, entails higher risks given the short time frame of the trade because most speculators only hold their selling position in a span of weeks to few months. But when the company’s shares sustain its declining price, it adds more value to your portfolio.
If shares prices go up after shorting a stock, investors may not worry as they can place a buying order and return the stock to the lender or the broker, closing the short position.
Shorting a stock can also use to protect your investment portfolio through hedging. Normally, investors with long positions capitalize on short selling to protect their stocks. This less risky strategy does not aim to gain any profit but only to safeguard other investments.
Hedging as a trading technique
Hedging is like investing in an insurance for your property or car. You can utilize, for example, a derivative contract (like futures or CFDs) in the stock index to pull off short positions in times of downward movement from your long position on equity shares.
Shorting a stock gives relief to investors in times of a bear market.