Does Shorting Stocks Make Sense?

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Well guys here today i want to take you through shorting stocks i want to talk about if you should be shorting stocks now if that’s a smart decision shorting stocks a lot of people kind of hear about it old shorting shares is that something i should get into is that something i should be interested in is there something smarter i could do out there and so i want to

Give you my full opinion around short selling stocks now if you don’t really know what short selling a stock means essentially you’re betting that a stock will go down in price so think about it in a traditional respect of like if you buy apple stock right or you buy facebook stock you buy google stock or whatever stock it is right you’re basically placing a bet

That you believe those shares are gonna increase in value over time or hopefully they’ll pay you a bunch of dividend money or something like that but generally if you’re buying apple stock for instance you it’s because you believe apple price will the stock price will go up over time okay a short position when you go short shares you’re literally just doing the

Inverse you’re basically making a bet that you believe that stock will decrease in value over the coming weeks months or years or whatever you know depending on your circumstance and however long out you’re your kind of respect is in regards to shorting that stock all right so the simplest terms that’s what’s shorting a stock enos okay now when you short you’re

Borrowing shares from a brokerage okay that you are gonna go ahead and buy back at some point in time the difference between when you shorted those shares and what you buy those shares back for that is what your profit or losses and you could do that at any point in time okay so you can go in you know tomorrow and go ahead and short you know we’ll just use apple

Stock everybody knows apple stock right you go ahead and short sell apple stock tomorrow for instance from your brokerage as long as you have a margin account set up okay you usually have to have a margin account set up through your brokerage in order to short shares so you go ahead and short apple stock tomorrow because you believe apple stocks gonna go down

Tomorrow and then you can go ahead and buy back those shares the same shares you shorted you know you don’t say short 10 and apple shares tomorrow you go buy them back tomorrow if you want it and the difference between what you shorted those shares at in what you go ahead and bought those shares back for that’s gonna be the difference in what you lost or made on

That investment okay and you could do that for you know the day or the week or the month or years in the future it really doesn’t matter at the end of the day okay so let’s go through a couple scenarios here so if you short a stock you know this your short stock abc and let’s say that stocks $100 a share all right if that stock goes to a hundred and fifty dollars

A share and you go ahead and buy back those shares you cover your short position as it’s called okay you go and buy back those shares you cover your short position you get out of that you just lost $50 per share cuz the stock went up in price okay now if you were along that stock obviously you’re doing very well but when you’re short that’s not such a good thing

Okay but let’s say that stock those go your weight the stock has a really hard time they have some bad earnings whatever happens okay let’s say the stock falls 50% it goes all the way down to $50 a share now we’re in a situation where you just gained $50 per share okay so obviously you know if you short a stock you need to go your way no different than if you’re

Long you need the stock to usually go up over time okay now keep in mind we’re going to long shares you know some companies pay dividends so sometimes you can make dividend money still you know which even if the stock doesn’t go up you at least get dividend money with with shorting shares there’s no different money for you or something like that okay so if you’re

Shorting shares like you’re just counting on basically a stock price going down over time alright so now let’s say the best case scenario happens possible what is the best case scenario that a few short of stock a b and c well that’d be the stock goes to literally zero dollars a share okay and goes from $100 where you start a short in that and when you go to cover

It’s a zero it like literally went bankrupt or something like that that would be the best case scenario possible for you and in that situation you make a hundred percent return on your investment so when you go ahead and short a stock essentially you’re the best case scenario you can have happen for you is you make a hundred percent on that stock alright in that

Once again that means the stock literally went to zero and you got your 100 percent gain okay now you got to keep a couple things in mind and keep in mind these couple things i’m gonna share with you this is not even the worst part of this we’re actually going to get into the worst part in just a second okay couple things to keep in mind here number the loss is

Unlimited when you short shares okay so for instance let’s say you short stock a b and c the stock a b and c can go to $200 a share stock abc can go to $500 a share a thousand dollars a share ten thousand dollars a share okay so if you short this talk and things start to go really bad you could literally lose an unlimited amount of money when you short a stock you

Can literally lose an unlimited amount of money and that is rough okay you know if you go long shares for instance okay if you go long your loss is limited at a hundred percent right you buy this stock at one hundred dollars a share you buy one share your loss is limited at a hundred dollars because let’s say the company goes bankrupt it goes to zero you just lost

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Your hundred dollars okay now hopefully if you’re buying companies have great balance sheets and it very profitable it should be very unrealistic right but needless to say your your your basically your loss is capped at a hundred percent when you short shares it’s literally an unlimited loss now a brokerage could also force you to cover your shares at some point

In time if it goes really the wrong way or something like that and you get into a margin call situation or something like that okay keep in mind you’re borrowing the shares at the end of the day so you know it’s possible there could be a situation where you were forced to buy back your shares okay but needless a short shorting shares your loss your potential loss

Is unlimited whereas you go long shares your loss is limited 100% okay number two you have to pay interest when you are shorting stocks you have to pay interest when you that you were shorting stocks so if i go long shares of unless you’re going on margin or something like that but if you have a regular brokerage account and you go buy some shares of a stock today

You go buy some shares of apple stock like you like you don’t have to pay interest on that when you short shares you generally always have to pay interest and the interest rate can be different depending on different stocks i’ve seen it five ten percent plus sometimes when you’re shorting a specific stock out of there so which means you’ve got to get at least a

Five ten percent gain just to break even on what you’re paying an interest per year okay never mind you know if you’re not getting that then you basically could lose money plus you had to pay interest in it so it can get really ugly okay now keep in mind this is not even you worst part of shorting stocks okay this is not even the fourth part those two things that

The fact that your loss is unlimited and also the fact that you have to pay interest that’s not even the worst part let’s get into the worst part now already guys the story getting into the worst part of being a short seller and why short selling stocks is absolutely usually a horrible horrible idea and usually a very unprofitable endeavor okay we already talked

About the potential loss is unlimited we already talked about the potential gain is a hundred percent which is no fun okay number three you have to pay interest while you’re short we talked about all three of those number four the market goes way up way more than down okay most years most weeks most months most decades where does the stock market go it goes up

Look at any chart you possibly want out there in the s&p 500 most of the time the stock market goes up way more than it goes down basically meaning if you’re shorting stocks or shorting the entire market in general you’re just fighting an uphill battle because you’re fighting against the trend which is a trend the market goes higher and higher and higher over

Time sometimes it dips for a few weeks maybe a few months maybe even a year or two but over the long term you just pull up a chart of the s&p 500 the dow 30 it doesn’t really matter the nasdaq and what you’ll find is yes sometimes they’re worse and down periods where the market got too overvalued at a particular time stock prices need to come down or there

Was a big recession or something like that and in those few instances you could maybe uh you know successfully shorted shares but that’s really too hard to time the market specifically or even stocks in general okay so you’re fighting an uphill battle number 5 the government wants an increasing stock market okay all politicians that are in office they want the

Stock where to go where they want it to go up over time so they can put that on their record they say soon as i became president or since i you know got elected as such in such position the stock market has increased blah blah blah percentage or whatever okay no one no one wants to become you know high-ranking official in government and the stock market decreased

Over the time while they’re in office right that’s obviously not a good sign so you’re fighting you know government officials who are at the end of the day they want the stock rate you know stock market to go up and they’re probably gonna do incentives to try to make the stock market go up over time and you know maybe it could even be done by the fed quantitative

Easing different programs like that neither this to say you know once again you’re fighting an uphill battle because the government literally wants an increasing stock market over time okay number six you’re fighting executive this was a lot of very brilliant individuals that want increasing stock prices of their stock why because a lot of you know executives

Compensation packages are tied to their stock price so if a stock doesn’t do good an executive can still make money they were sort of to make their base salary but they’re probably not gonna make much for bonuses so if an executive really wants to bank money in a big big way which all people do crazy does not i don’t think there’s any executive out there that says

Oh i can make an extra five million this year but i don’t want to okay all executives want to make more money at the end how do they do that a lot of them need to have their stock prices increase so they’re gonna try to do whatever it takes to have those stock they’re gonna try to you know make the net income go up to whatever it needs to so the stock price can

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Increase over time they’re gonna try to do buy back shares they’re gonna try to you know think about different ways of financing deals they’re gonna do whatever it takes acquisitions so that overall that stock price because keep in mind the executives are basically chosen by the board of directors the board of directors are chosen by the investors of the company

So if the investors of a company are unhappy they’re gonna elect new board of directors which means those board of directors are gonna get replaced by somebody else and board of directors doesn’t want to get you don’t replace they get make their easy one hundred to three hundred thousand a year for you know just coming to a few meetings and deciding these folks the

Executives don’t want to get replaced obviously they want to keep making their millions of dollars and getting those you know potential huge base you know payouts there so needless to say all these people are fighting for higher stock prices they’re gonna do whatever it takes that you know over time those stock price to increase so they can make maximum bonuses

Okay number seven companies are usually constantly buying back shares i mean under most companies i know of and probably most companies i have have actual share buybacks going on right now okay this is another reason you’re fighting an uphill battle if you’re shorting stocks a company can literally use their profits and plow that money money off the balance you

Think it just plow that money right back into the stock and then you’re fighting an uphill battle of not only could other you know basically people out of going long shares be buying the stock but then the own he could be plowing tens of millions hundreds of millions or even billions of dollars into that stock each month or maybe each quarter and so you’re fighting

This uphill battle where you’re shorting showers you need the stock to go lower but you have all these things working against you that basically are going to probably make the stock go up over our time all right number eight if that’s not already bad enough the masses meaning individuals out there regular folks are usually constantly flooding money into their 401ks

There are individual retirement accounts think about it this way you imagine you know there’s a there’s a big company and employees let’s say 30,000 people let’s say not everybody there e2 contributes to their 401 k every year let’s say only half of them do that okay let’s say each of them does a hundred bucks a month or something like that on average for 15,000

People run the numbers on that that’s a big thing for at the end of the pie right that are constantly flooding money and then think about how many millions tens of millions of just americans alone or constantly flooding money into their 401 ks or their individual retirement accounts and usually that’s way more in inflow than outflow over the long term and so it’s

Another reason you’re fighting an uphill paddle in this game that you’re fighting uphill battle then you think about it people in other countries a lot of times of trying to invest in 401 ks maybe in europe or asia asian different reasons and whatnot they want to invest in the states they can do so through 401 k’s or individual retirement accounts it’s like it’s

It’s just a massive hill battle okay and number done this is your really really smart short seller and you had this company pegged and you’re like you’re so smart okay you know this stock is insolvent they’re gonna go out of business they’re gonna become irrelevant their product was a fad blah blah blah whatever your reasoning is okay and you’re like that stock

Is gonna go down the tubes okay and you’re like i’m shorting shares there are 10 bucks here and the stock starts to go down and goes down to nine dollars and it goes down to eight dollars in the prospects for the company or looking worse and worse and you’re like i’m gonna kill it on this one i’m already up 20 percent or whatever you gonna go down seven dollars

You’re like oh yes this company’s going out of business okay they’re gonna do so bad the numbers keep coming out there their money’s leaving their balance sheet they’re doing so bad i’m gonna make so much and then one morning you wake up and company xyz just bought company abc that you short it and they just bought them out for $12 a share and you just say now

You went from you who thought you were the smartest man in the room you’re gonna make so much money to now literally overnight their company’s gonna get bought out and you just lost a lot of money on those shares okay so that’s another reason you’re fighting an uphill battle is the fact that any company can basically get bought out at any time especially if they’re

Doing that and the shareholders will likely approve a buyout if they can get a 30 percent or 50 percent premium to their shares and so you go from a position where yeah you brewer right that that stock prolly was gonna go out of business that company probably was gonna go out of business they were probably not gonna stop losing money they were probably you know their

Balance sheet was getting worse and worse they were you were probably right the stock was gonna go to zero at some point in time but it never got there because they got bought out because somebody else you saw the ability of that company or you know they could stream their in the products in bring it to profitability or something like that whatever the reasoning is

It doesn’t really matter and then you just went from oh you were gonna make a lot of money to literally overnight you are guaranteed to lose money okay so basically at the end of the day if you’re shorting shares and then we’ll talk about what’s a better option in my personal opinion than shorting shares is you’re basically fighting against a rigged system against

You the system is rigged a hundred percent to go up over time okay stocks are meant to go up over time the markets are meant to go up over time the whole thing is like rigged against you okay it’s literally as you know i live in las vegas okay you need to say the the casinos they don’t have one single game where they don’t have the best odds okay it doesn’t matter

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What you go and do it the casino all the games are rigged more in the houses favor then in your favor as the player okay it’s just the way it is okay blackjack craps it doesn’t matter what game it is the the slot machines it literally doesn’t matter the games are rigged against you okay that’s all those massive buildings got built as they like to say okay so if

You’re shorting stocks the game is rigged against you and you’re basically fighting an uphill battle that you’re trying to rig you’re trying to win against a rigged game it’s and it’s why you see so many short sellers that are so negative all the time or had that ad – you know like man why are they so negative like it just doesn’t seem like they have her smile

And they’re just so unhappy and things like that and you got to understand if you had a fight against the system that was rigged against you every day i would probably walk around with a frown on my it’s like you can either like like be on the right side of things go long shares and probably make a lot of money over time or you can try to fight against the system

And it fight an uphill battle and you’re probably gonna loose in the end okay and it’s just the way it works in this game okay so in my personal opinion the better option out there no pun intended is if you are super negative on a stock or you’re super negative on the markets in general generally the better option is generally to buy put options in a scenario like

That now that the the problem of put options is you know yeah you can lose you know let’s say you buy put options she’s a good thing about put options you can lose 100% of your money with a put option you buy a put option you open a position and buying a put option you can lose maximum 100 percent once again you short shares you can lose you know unlimited amount

Of money – you don’t need to pay interest as long as you’re not behind that put option on margin or something like that you don’t to take interest so let’s definitely very some good things again short position the downside is short position you can keep you know open front unlimited amount of time you know essentially a put option you do have to put a timeframe

On it so either like next week or a few months from now or like a year from now or two years from now usually like two years out is usually the furthest out you can either buy call options or buy put options obviously if you’re going negative usually the scenario is buy put options and yeah it’s usually a way better option because you can usually do that with way

Less capital and then keep in mind you’re capping your loss at a hundred percent you let’s say you buy a thousand dollars in put options on stock you know abc here okay your your potential loss is a thousand dollars let’s say the stock goes up and your your options expire worthless users lost a thousand bucks but that’s the most you can lose if you bought the foot

If you short shares you put you know let’s say ten thousand dollars into that because you want you know equivalent you know chance of the kind of making money no your potential is actually way more than ten thousand and you could lose a ten thousand but you could lose way more than that because the stock could go up way higher than that essentially so my personal

Opinion i’m negative on a stock or i’m negative on the market in general what i go to is i buy put options okay and i haven’t bought put options in a while i bought put options on for a few years ago i make good money on that i think i made 20 or 30% and like a month or two time and that’s all i say the last time i did that that might have been i don’t know two or

Three years ago probably mattered ike that was quite a while ago i usually don’t do it very often but if i see a scenario where i’m like i see the stock and i’m like i have got a yeah i’m negative on it and i have a you know a good you know kind of bearish thesis around it i’m gonna buy put options in it okay and that’s just the way it is shorting shares that’s

Way too tough of a fight and just being negative on stocks or negative on the market in general is way too tough of a fight that it’s so many things that are working against you constantly that it’s like a never-ending struggle in us why you know it’s it’s not a healthy way to live man being a short seller and then shorting stocks is not a healthy way to live is

No fun you get those huge like short bursts of fun kind of like you know you go to a casino and you might just pull the slot and you might win once right or you might play some blackjack and you might win a few hands you know like an you hit that short burst but guess what happens over the long term generally it’s not gonna go your way cuz you’re fighting a rigged

Game against you and that’s that’s no fun to do on an everyday basis guys so my opinion shorting stocks absolutely not a good decision usually most of you know almost all scenarios if i’m gonna do something because i’m negative i’m buying put options that’s me personally i wanna hear from you guys in a comment section as always let me know your opinion down there

As always thank you for watching have a great day

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Does Shorting Stocks Make Sense? By Financial Education

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