It’s important to understand, at its core, how shorting selling works…
here is a textbook definition:
-Short selling involves borrowing a security and selling it on the open market. You then purchase it later at a lower price, pocketing the difference after repaying the initial loan. Short selling occurs when an investor borrows a security and sells it on the open market, planning to buy it back later for less money. Short-sellers bet on, and profit from, a drop in a security's price. This can be contrasted with long investors who want the price to go up.
Now that we have a clear understanding of how the short selling process works it’s important to understand why it’s important. Contrary to the negativity surrounding short selling there are many benefits of short selling. Short selling can drive market liquidity, price stocks more efficiently, mitigate market bubbles, as well as provide a check on upward market manipulations….Market manipulation: Pump and dumps are a fine example of why short selling is necessary…Short sellers of a for of neutrality, market equilibrium if you will. The true job of a short seller is to detect and expose negative news such as poor firm performance that investors have yet to be informed about, or unethical and opportunistic behaviors taken by managers at the cost of investors. Short sellers are like
detectives of the capital markets.
The next point is something that we’re all going to be able to agree on and that is the profit potential. If you’re a market participant, you’re here to make money. Bull or Bear, you’re here to scratch out a few bucks! Agreed? So, with that being agreed upon, it’s important to key into how much money can be made on the downside and how fast that P/L can rally if you’re in the right short play! If you’re trading options (*Puts*) and you connect with the trend correctly…and quickly, you can realize abnormally large gains… HOWEVER…and this is huge, IF you’re wrong, on the wrong side of the market or get caught in a short squeeze, the losses can really add up. If you’re trading options your risk will never be greater than what you paid for the premium. But if you short a common stock the risk profile changes.
I want to close out with this..I totally realize that you might be a
“short hater”. If you are, that is totally fair and I completely understand!
The reason most people dislike short selling is the idea about profiting from someone else's failures. I think we can agree that not all companies deserve to be publicly traded and that there are a ton of situations where stocks need to get realistic about their truth worth. Short sellers get us there!