Loading ...
.jpg)
You have probably heard about short trading in the market. Maybe your stock broker told you to try it, or a friend told you how much money they made through a short trade, or perhaps you know about it because of the movie ‘The Big Short’. But you don’t really know about it. So, let’s learn about short trade.
Short Trading
In simple terms, short trading or short selling, as it is also known, is a stock market investment strategy to bet against a stock. It is a bearish move needing a stock’s value to drop for an investor to earn a profit. Remember ‘The Big Short’ when they bet against the real estate sector?
For an investor to sell short, they would need to borrow the stock through their brokerage firm from someone who owns it. Subsequently, the investor sells that stock and receives the proceeds. Now, the investor is hoping the price of the stock will drop and give them a chance to purchase it at a lower price. Whatever money is left after buying the stock is the profit earned. The below graph should help explain it further to you.
.jpg)
This trading strategy is a high-risk, big rewards strategy that requires investors to keep a close eye on market movements and share price fluctuations. It is for this reason that this is a strategy preferred by active or experienced investors. After all, when everything goes according to plan, it can yield impressive returns. But the downfall is that it can also lead to considerable losses if you don’t have a good strategy in place.
So why are they few takers?
Of course, short selling seems like a smart strategy, but why do so very few investors use this strategy? Well, it is generally market behavior. Most investors would like to see its value increase when they invest in a stock, fund or investment. Even though the market swings in either direction, in the long term, the value of a particular stock is always like to be on an upward trajectory.
However, shorting stocks is very popular among professional traders, especially day traders. Even though it can make a profit, it can drive the stock down too quickly. When an investor shorts, it allows them to profit from market movements. As investors can sell and buy throughout the day based on price movements, many traders don’t care which direction the price is moving, only that it is moving.
Metrics for short trading
On most occasions, traders are likely to use two short trading metrics to determine if a stock is overvalued or expected to drop:
Days to cover ratio: Here, the total number of shares that are held to be short is divided by the stock’s average daily trading volume. A bearish indicator for the stock is when there is a high value for the days to cover ratio.
Short interest ratio(SIR): Here, the ratio of shares that are shorted is measured with the number of shares floating in the market. A very high SIR is associated with stocks that are falling or stocks that appear to be overvalued.
| Pros | Cons |
| Possibility of high profits | Potentially unlimited losses |
| Little initial capital required | Margin account necessary |
| Leveraged investments possible | Margin interest incurred |
| Hedge against other holdings | Short squeezes |
Tips to short trade
If you are day trading via short-selling, it is pertinent to strategize and plan well. Here are some tips.
.jpg)
Short trades are essentially a pessimistic move, requiring a stock’s value to decline so that an investor can make money. It's a high-risk, short-term trading strategy which requires constant stock monitoring and requires an adequate understanding of the markets and their swings. Thus, it may not be a suitable strategy for passive individual investors. However, for active traders, short trading can produce positive returns during down markets. That being said, if you still decide to make short trade, it is essential to strategize a clear exit plan.
The content in this blog, including any research, analysis, opinions, forecasts, or other information (collectively, "Information"), is provided by Century Financial Consultancy LLC (CFC) for marketing, educational, and general informational purposes only. It should not be construed as investment advice, a recommendation, or a solicitation to buy or sell any financial instruments.
This Information may also be published across various channels, including CFC’s website, third-party platforms, newsletters, marketing materials, emails, social media, messaging apps, webinars, and other communications. While CFC strives for accuracy, we do not guarantee the completeness, reliability, or timeliness of any content. Any decisions made based on this Information are at your own risk. CFC accepts no liability for any loss or damage arising from its use.
Trading financial products involves significant risk and may not be suitable for all investors. Please ensure you fully understand the risks and seek independent professional advice if necessary.
Please refer to the full risk disclosure mentioned on our website.
Regulated by SCA
Century Financial Consultancy LLC
Reach us:
-
Dubai
6th Floor, Emaar Square Building 4,
Downtown, Dubai, P.O. Box 65777,
Dubai, United Arab Emirates -
Abu Dhabi
27th Floor, Office 2701,
Shining Towers, Abu Dhabi, UAE - +971 (4) 356 2800
- info@century.ae
Disclaimer: Trading in financial products carries substantial risk. Leveraged over-the-counter (OTC) derivatives, such as Contracts for Difference (CFDs) and spot forex, may result in losses exceeding initial deposits and may not be suitable for all investors. These complex instruments do not confer ownership of the underlying assets. Investors should carefully consider their investment objectives and risk appetite, and seek independent professional advice if necessary.
Century Financial Consultancy LLC (CFC) is licensed and regulated by the Securities and Commodities Authority (SCA) of the UAE under license numbers 20200000028 and 301044 to carry out the activities of Trading Broker in international markets, Trading Broker of OTC derivatives and currencies in the spot market, Introduction, Financial Consultations, and Promotion. CFC is incorporated under UAE law, registered with the Dubai Economic Department (No. 768189), with its office at 601, Level 6, Building No. 4, Emaar Square, Downtown Dubai, UAE, PO Box 65777.
The content on this website is provided solely for informational and educational purposes and does not constitute an offer, recommendation, or solicitation to buy or sell any securities or financial products.
Products and services offered by CFC are not intended for use in any jurisdiction where such use or distribution would breach local laws or regulatory requirements.
Alert: Fraudulent Activity Notice
Century Financial Consultancy LLC (“Century”) has become aware of fraudulent individuals and entities impersonating our firm through unofficial websites, social media channels, and messaging applications such as Telegram, WhatsApp, and Discord.
Please be advised:
- Century does not manage investments on behalf of clients.
- Century does not solicit funds or guarantee investment returns.
- Century does not accept or make payments in cash, cryptocurrency, or digital assets.
- We do not conduct business via social media or messaging platforms.
Our only official website is www.century.ae, and all communication is conducted exclusively through verified channels.
We strongly urge the public to remain vigilant, verify the authenticity of any communication claiming to be from Century, and report any suspicious activity. Century disclaims any responsibility for losses arising from dealings with unauthorised or fraudulent parties.
