Shorting is better to be avoided for most:
· Could lose more than 100% of the investment.
Actually, in theory, there is no limit. If the shorted stock price rises by 10 times, the loss is well over 10 times money invested.
· Need to pay dividends and interest for the shorted stock.
The higher the dividend rate for the stock, the more you have to pay. The experienced would avoid high-dividend stocks to short.
Need to pay interest for ‘borrowing’ the stocks to sell. Brokers charge interest rates differently and it could be a huge saving to shop around if you short stocks a lot.
· Need both fundamental and technical analyses.
From my experience, a technical analysis is more important in shorting.
· If successful in shorting, gains are subjected to the short-term capital gain taxes which are typically higher than long-term capital gain taxes.
· Not all the stocks can be shorted.
· Selling short is not allowed in retirement accounts as of 2013. However, you can buy contra ETFs for a group of stocks to bet against the market or a sector, but not on a specific stock.
· The following sectors are riskier: the drug, mine, bank (unless you know the quality of mortgages) and insurance sectors. A single drug approval could drive the stock price up by more than 25% in one day.
· There is no perfect timing. Some stocks fluctuate a lot with no rational reasons. Some stocks may be manipulated.
Writing put options is similar to shorting a company with more advantages than disadvantages.
My e-book Debunk the Myths of Investing could save you a lot of money in investing. The above is one chapter out of 105 and some important chapters will not be included in the blog.
Sample portfolio for the book.
(c) 2013 Tony Pow
Disclaimer. I'm not responsible for your actions in your investment. Treat this as educational information and past performance does not guarantee future performance.