A Quick Introduction to Short Selling
Updated: 2021-02-01T06:56:40Z

 

When retail investors and some big whales banded together to push the price of GAMESTOP, it flew to the moon, leaving many investors who positioned the stock as a short with a losing position.

A Quick Introduction to Short Selling
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It further proves that if enough individuals share the same goal, it can change things either for the better or worse. Aside from showing the power of unity, it also shows the dangers of shorting a stock position.

 

 

What Is Short Selling?

 

In its simplest definition, Shorting a stock means buying a share at a higher price and selling it when the price drops. The difference will be your profit.

 

 

Going Long vs Going Short

 

  • Long - Buy Low Sell High is equal to Profit
  • Short - Buy High Sell Low is equal to Profit

 

 

Long or Short What's the Difference?

 

In the traditional way of buying a stock (long), you buy a share you own that share. Unlike short selling, you are borrowing the share first before buying it.

 

 

So Short Selling Is a Good Deal?

 

Not necessarily. Because you are borrowing the share when going short, the catch is it has an expiration date. Meaning, once you reached that date, you need to return the shares for whatever the price.

 

A Hypothetical Example

 

Stock: DITO
Position: Short
Buy Price: 12.50
Expiration Date: 15 days

 

In an ideal scenario, if after 15 days the price is at 7 then you are enjoying a 5.50 difference. This is PROFIT on your part.

 

However, if the price after 15 days is at 18, then you are going to return the shares by buying them at 18 with a 5.50 additional cost. This is LOSS on your part.

 

 

Is Short Selling Allowed in the Philippine Stock Exchange?

 

The news of having a short-selling feature made rounds in 2018. Because of the dangers of short-selling, it only gained approval from SEC in 2020.

 

As per the latest news, short-selling will be rolled out in the first quarter of 2021.

 

 

Takeaway

 

Once this feature is in effect, Big Whales may enter on a frenzy of shorting a stock, which will leave retail investors caught in the crossfire. On the upside, it will add more movement to the market. Profit-taking can be done either way (Up or Down).

 

  • A Long position means Buy Low Sell High.
  • A Short position means Buy High Sell Low.
  • A short position has an expiration date, which means you need to return the shares by paying the broker.
  • If the price of the stock goes down, you WIN. If it goes up, you LOSE.

 

 

Quote

 

"Primary research is crucial and not as many people do it as you think."
Jim Chanos
 
 
 
- Your Life In Perspective by ÆlfRæd (Elf Counsel)
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