The Top Disadvantages of Short Selling Securities

The Top Disadvantages of Short Selling Securities
June 27 10:29 2018 Print This Article

Short selling may be a really profitable strategy when it comes to investing. However, you have to take on the challenge of overcoming risks and dangers—and such risks and dangers are quite a lot.

In order to make short selling work in your favour, you have to Guide to Inventing master all the risks that you face whenever to do it. Of course, knowing such risks and disadvantages is just the first step toward the right direction.

Here are the top risks Contract for Difference and disadvantages that you should be aware of if you want to try short selling as your trading strategy.

Losses can be infinite.

When you do short selling, your potential gain can only be limited to how much the price of the stock may fall. And when the price turns to zero, you’ve theoretically reached the largest gain you can achieve.

Meanwhile, if the stock turned out to be strong and went up instead of down, it could spell unlimited losses to you since you’ll have to buy that stock back to cover your position. If the price of the stock doesn’t stop rising, your debt will not stop ballooning.

Going short is a gamble.

If you’re going to look at history, stocks have an upward trajectory over time in general. In the longer run, a better part of the overall stock market rise in value.

In addition to that, even if a company only ever experience modest rise in value, the power of inflation can still push its value higher.

So to some extent, going short or short selling is going against the direction of the general market.

Shorting makes you borrow some money.

Shorting is also known as margin trading. If you want to go short on certain securities, you have to open a margin account.

A margin account enables you borrow some money from the brokerage firm. You will then have to use the existing investments in your account as a collateral.

The catch is that you have to meet the required maintenance minimum of 25 percent. As we all know, when trading, it’s easy for losses to get out of hand. So if your account falls below 25 percent, you will most likely receive a margin call.

After the margin call, you will be required to deposit more cash in your account to meet the requirement. If you cannot do that, you will or the broker will have to liquidate some of your investments with or without prior notice.

Short Squeezes do happen.

When the price goes up instead of down, most short sellers typically rush in and buy the stock to quickly cover their positions. And with that, the demand for the stock goes high. And the high demand pushes the stock’s price higher. This is called the “short squeeze.”

More often than not, positive news about the stock can trigger a chain reaction that can lead to a short squeeze. Overall, if you’re not really careful while short selling, you’ll end up losing a lot of money in a rapid-fire manner.

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Demarco Gonzalez
Demarco Gonzalez

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