All my life I have been a “buy and hold” investor. this has worked pretty well, but I am attracted by the big money one can make by shortselling stocks. It is dangerous-hence, you need to protect yourself with hedging strategies.
Is there a good book on shorting that explains all of this?
I think 2014 will see some big market drops-shorting may well be a good strategy for the new year.
You need to have “big money” already if you want to short stocks. The brokerages I use won’t allow you to short stocks unless you meet certain asset levels. They want to know that you will be able to cover your losses if the stocks you short go up instead of down.
I also question the idea that there’s some big advantage to shorting over being long. Identifying a stock that will go down a lot is just as hard as identifying a stock that will go up a lot.
If you just think that the market as a whole is overvalued and is likely to drop in 2014, look back a year and see what people were saying then. They were saying that the market was overvalued and was likely to drop. They were wrong then and odds are that you’re wrong now.
Shorting stocks is quite dangerous; you have a limited upside, and theoretically unlimited downside.
Stick to being a buy-and-hold investor is my advice. Knowing when and how to short is quite difficult. Think of the emotion tied into the market. There are times when something becomes less valuable but people value it more because they are illogical.
It is true, however, that piles of money can be made shorting. Investors tend to be quite scared of losses and rightly so.
Your better option is to save the short-selling for professionals and play the market with counter cyclical stocks. Look into those!
I read the title as “How I Learned to Sort Socks” and I was like, dude, not that hard…but maybe there’s a new technique! I should check out the thread! Alas, my laundry skills remain stagnant.
Selling stocks that you don’t own because you anticipate being able to repurchase at a lower price is, as already noted, pretty darn risky. Puts and calls also have some risk, but I’d consider it a good deal safer than short selling. Why don’t you start off with some options trading?
You are not better at picking stocks than the professionals. Even the professionals have trouble beating the market. What makes you think you can figure out things that they can’t? And if you can, you should stop trying to make chump change by investing your own money and go to work on Wall Street to make big money investing other people’s money.
What stock do you want to short? How far do you think it will go down in the next three months? What do you think is resistance (area where selling will over-come buying) over next three months?
Let’s see if we can build a strategy.
Think of shorting stocks as moving from the nickel slots to the $10k Baccarat table.
All the financial experts predicted the same thing for 2013, and the markets were up over 30%. Why do you think your forecast is accurate?
Everytime I even think about shorting stocks, I flip on CNBC and listen to Options Action while I’m driving. After two minutes my head starts to spin and I, literally, have no idea what they’re talking about so I change the channel and shelf the idea for another few months.
Once in a while I think about dipping my toes in the water and trying to find something small and safe to short, but I honestly don’t even know where to start. I’m doing okay on the long side. Maybe once I’m up 50 or 60 thousand I’ll thinking about playing with shorts. I’d hate to wipe out the little bit of gains I’ve made in the past few years because I don’t know what I’m doing.
I always think it’s funny that the experts, IMHO, seem so short sighted. For the two years or so that I’ve been investing, I’ve been listening to CNBC on the radio nearly everyday, and nearly everyday they say the same things. I can’t tell you how many times I’ve heard someone say “The DOW hit record highs today, I don’t think it’ll ever go any higher*” Well, you’ve said that probably a hundred times in the last two years, maybe stop saying it. Or, “GLD can’t possibly go any lower or [something bad will happen]” Well, it went lower and nothing happened, so stop saying it.
And then you’ve got the bears who are constantly talking about how the market is just about ready to crumble to the ground. They’ll come on today and point out some pattern that’s emerged over the last week and explain that this pattern ALWAYS shows up right before the entire market falls 20%. Then they’ll show up a month later and show you a different pattern and show how this pattern ALWAYS shows up right before a 10% drop on tech stocks and so on and so forth. None of it ever happens.
I learned quickly not to take what any one person says and assume it’s going to happen for sure. These people are just guessing like everyone else.
*The funny thing about the comments about the DOW is that even though they act like it’ll never go any higher then it is right now, they usually mention that they were making these same statements 20 years ago.
Partition your investments. 50% in solid long-term options, 30-40% in reliable growth… and the remainder in whatever strikes your fancy. If playing around as a day trader with $10k fails, it won’t sink you.
My broker listens carefully to my speculations, because I have a solid string of spec buys that paid off wildly, greatly outperforming the fund investments. So it can be profitable if you follow good hunches.
(My worst fault is bailing this -><- much too early; twice I’ve had stocks blow through the roof days after I sold out. I did okay, but a little more time would have been a lot okayer.)
To actually answer the OP’s question: you want a book on “stock options.” You’ll only need the very simplest ones for what you want to do, and you can probably get away with the Wikipedia article.
Basically, options are a way to give yourself to the right (but not the requirement) to buy or sell a specific number of shares of a specific stock at a specific price at a specific time. Getting this costs you something in addition to the price of the stock, and if you choose not to use it, you’re out the option (“contract”) price. They have a bunch of uses, but in your case you’re going to want to use it as insurance – there are a lots of names for it, like “option covered short”.
The general idea is that when you short a stock, you’re selling shares you don’t own. Since you’ll have to make that up in the future, you’ve got the potentially unlimited downside that the price may go way up. The price of the contract will vary based on the dates and prices you pick.
So at the same time as you sell the shares, buy an option to buy them back at either the same price or some higher price that limits your loss to something you can afford. The goal here (as with insurance) is that you WANT to lose the money you paid for the option. If your short-selling bet was right, and the price goes down, you simply let the option expire unused.
On the other hand, if the price goes up, you’re guaranteed the right to buy the shares back at a “reasonable” price.
Note that buying the option cuts into your profits (or adds to your losses, if you have to use it). There are also lots of both broker and financial rules about it – certain types of accounts can’t buy options, and there are asset/margin requirements. But it can make shorting stocks safe enough to be a reasonable part of a portfolio. Shorting them “raw” (without a protective option)…well, read the other responses.
Put 5% max. of your portfolio into an ETF that shorts the market, and your maximum potential loss is 5% of your portfolio.
The bonus is the higher the market goes the smaller a percentage of your portfolio an inverse ETF makes (assuming the rest of your portfolio is going up with the market).
I think asking how to short the market is proof positive that more risky techniques are not a good idea for you.