savio13
Savio Cabral
In today’s unstable market, many people are considering shorting stocks. This might be because they believe the market is going to get worse, so they want to bet against the market or they just wish to hedge their bets. Here are three points to consider when going short:
1. When possible, keep the time frame short. It’s best to short a stock when you think a factor that will happen soon will cause it’s price to drop. It may be because you think they will miss the quarter badly or some legal dispute will go against them. Either way, it’s best when an event will trigger a sharp selloff than hoping the price will drop in the long run.
2. Be clear about your exit strategy. If you are dead sure a stock will tank long run and will hold a stock short even if it goes up 50%, then only short an amount where you are comfortable losing quite a bit in the short run. In other words, if you are certain that stock XYZ is going to zero in the next few years, but believe it may shoot up in the short run due to investor irrationallity, give yourself some margin of safety so you don’t risk a margin call if the stock goes up. On the flip side, if you hope to make a quick buck off of a stock’s negative momentum, set an exit point where you’ll cover your short no matter what as to avoid escalating losses.
3. Don’t short a stock just because you think it’s overvalued. Many stocks are overvalued; it doesn’t mean they will go down anytime soon. Also, an overvalued stock may just stagnate for awhile instead of diving down. It’s better to short a stock because you think the company is bad than because you think people are overpricing it by a little too much. Also, you may be overlooking the stock’s growth or book value, which may give the stock good reason for its valuation.
1. When possible, keep the time frame short. It’s best to short a stock when you think a factor that will happen soon will cause it’s price to drop. It may be because you think they will miss the quarter badly or some legal dispute will go against them. Either way, it’s best when an event will trigger a sharp selloff than hoping the price will drop in the long run.
2. Be clear about your exit strategy. If you are dead sure a stock will tank long run and will hold a stock short even if it goes up 50%, then only short an amount where you are comfortable losing quite a bit in the short run. In other words, if you are certain that stock XYZ is going to zero in the next few years, but believe it may shoot up in the short run due to investor irrationallity, give yourself some margin of safety so you don’t risk a margin call if the stock goes up. On the flip side, if you hope to make a quick buck off of a stock’s negative momentum, set an exit point where you’ll cover your short no matter what as to avoid escalating losses.
3. Don’t short a stock just because you think it’s overvalued. Many stocks are overvalued; it doesn’t mean they will go down anytime soon. Also, an overvalued stock may just stagnate for awhile instead of diving down. It’s better to short a stock because you think the company is bad than because you think people are overpricing it by a little too much. Also, you may be overlooking the stock’s growth or book value, which may give the stock good reason for its valuation.