Can you win money by betting against a company? Check out this technique.
Discover more about short selling, and investment technique you can use if you believe a company's future isn't so great.
Stock exchange markets are mostly easily understandable. We invest in a company in a way that you want it to increase its valuation and revenue. This way, you will be able to profit, because the company profited as well!
However, there is a special kind of investment where you bet against a company. This means that you think that a certain company will in fact face a major loss, and you will be able to gain money from this.
Well, this technique exists, and it is called short selling.
How does short selling work?
Let’s try to comprehend how short selling works, and for that to happen, let’s take an example.
For example: in hypothetical values, if an asset today is traded at 100 dollars and the investor believes that it will fall to 50 dollars, he can bet against this role performing the operation.
To this do so, the so-called taker would carry out the rent of the action for the time it understands necessary for the fall to materialize would sell the asset for 100 dollars and if he is right, at the expiration of the term, would repurchase the stock for the 50 dollars expected, so that he can return to the donor, the person who rented that paper to those who want to short selling.
So basically you are not even operating stock of yourself, in fact, you take a person who believes that the stock will lose its value and allows it to operate the assets in such a way that he “sells when the stock is high, sell when it is low”.
You might ask now: is there any good and big example of short selling? This way of making money maybe not be as popular as we might think.
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The GameStop incident
GameStop is a fine example of how you need to take a lot of caution when you decided to short sell. Many people lost their money because they wanted to follow a trend. And it turns out to end pretty badly.
For reasons that are irrelevant now, many people decided to short-sell GameStop, including major head funds. Turns out that this bet ends pretty badly, and GameStop’s stock price actually rose up.
Now here is the ironic part, because of the price rising, many people begin to buy GameStop to cover their short positions
In the example given in the last section, we see that, if the price rises or not, you need to buy it back regardless, since those stocks are not yours, you got a loan, and you can make a lot of profit, or in GameStop situation, a lot of loss
Because many people short sells GameStop, now many people need to buy GameStop, the result: when the search is too high, the prices rise up as well, which means more loss to the GameStop short investors.
Is it worth it to short selling?
Through the stories and examples, you can see that short selling is a very complicated strategy, and it needs a lot of knowledge and nerve to make it right. So, for newer investors, this may not be the best strategy to choose.
Another thing is, that many people believed that short selling is investing against the market, against progress. So, sometimes a short investor may be seen as a bad thing, and many people believe that betting against the orders may have consequences on our lives.
A good tip, again, is to use some money that you do not necessarily need, and test it out, to see if short selling is for you or not.
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