Why we should Never Short a Stock ?

Short selling, or shorting stocks, is when you borrow shares and then sell them in the hope of purchasing them back at a lower cost. Then you return the borrowed shares to the trader and take the difference. You can see the risk right now. These are just a few reasons why you shouldn't shorten stocks unless you have the expertise to back them.

Short Selling Examples

Let's say you think company XYZ has a high stock price and that it will only take a few years before the stock prices fall. Your broker allows you to borrow five shares of company XYZ. Two things could happen.

One, your call proves to be a sound one. The stock price of XYZ drops to Rs.80 in the near-term. You had previously sold the stock at Rs100 per shares. You now have 5 shares of XYZ for Rs.80 each. Return them to your broker and you pocket Rs.20 per share.

If the stock price of XYZ rises above Rs150, you will need to repurchase 5 shares at the higher price in order to repay your broker. The stakes and risk are higher in the real world.

Famous investors often short-sell, which can make headlines and sometimes cause market disruptions. But it is not the right thing for all investors.

The Difference Between Going Long and Shorting

Here's why shorting is more risky than buying or selling stock. If you purchase stock, or go long, your initial investment is the only thing you'll lose. If prices rise instead of falling as you expected, there is no downside to shorting. In such cases, you can buy back at prices that are closest to the price you bought to return the loaner and end your losses.

Short Selling Goes Wrong

Joe Campbell, an American investor, shorted stock worth $37000 on KaloBios Pharmaceuticals in November 2015. To his surprise, he discovered that the shares had risen 800% the day after a major newsbreak. His situation was made worse by the fact that his broker failed to make arrangements to correct the situation in time. He had to raise funds to pay for his losses.

Be Careful When Shorting Small-Caps

Investors learned one lesson from this incident: they should be cautious when shorting stocks. However, they must be extra careful and do their research before shorting small-cap companies. Because small caps are so volatile, it is easy to make mistakes and undercut their growth potential, leading to losses similar as Campbell.

You Must Have Enough Capital to Cover the Losses

Large hedge funds and investors with large capital can use short selling to offset losses. Investors with a smaller capital cushion or novice investors can be hit hard by stock price increases that are not in line with market expectations. This can sometimes wipe out all investment.

Only well-known investors can make a bad idea

The fact that a hedge fund or investor is short selling does not necessarily mean smaller investors should also short the position to take advantage of the potential spiralling prices. This may not always work as these short positions are often taken by large investors. They might not be short-selling all of their investments.

Real Expertise

There are many short selling opportunities. It is difficult to find the right shorting opportunities, which is something that many new investors might not realize. Stock trading requires deep-end technical research and trend analysis to monitor a company's performance. Short selling is also dependent on other factors such as valuation, price, and years of experience in investing. Before you can make quick sales for profits, you will need to have good analysts on your side.