[Applause]
short selling a phenomenon most traders
have heard of but the majority don't
actually practice the big market players
all make use of short selling to take
positions that most retail traders
currently don't
so
what is short selling
how do you do it and
could it be an effective part of your
trading strategy
[Music]
most people who invest in the stock
market are buying shares in the hope
that their value
increases but when it comes to trading
cfds you can also speculate on a falling
market
when you take a long position you buy an
asset and hold it to sell it later
you do this in the hope that it goes up
when you sell the asset you either make
a gain or a loss
but you can also take a short position
[Music]
short selling is simply when a trader
takes a position of first selling an
asset and buying it back later it's the
opposite of a long position
if it goes down in price before they
repurchase it trader profits from the
difference
so to the gentleman for two pounds
sorry my dear
short selling is as old as the stock
market itself the earliest recorded case
of this practice occurred in the dutch
republic during the early 17th century
when an investor named isaac lemaire
organized a short-selling raid on the
stock of the dutch east india company a
subsequent flurry of organized shorts
led to a crash on the amsterdam stock
exchange
from historical examples to the present
day here at capital.com we produce
regular videos about the financial
markets
like her recent explainer on how markets
performed during past recessions people
watch that film by clicking up here
short selling allowed traders
potentially more opportunities than if
they restrict themselves to just trading
long positions however traders do need
to bear in mind that short positions do
have more inherent risk than long
positions
the ultimate risk of a long position is
losing 100 of your investment if it
slumps to zero
the potential losses of a short position
may be unlimited as you can incur losses
greater than 100 percent but remember
the asset can keep rising against your
short position if you don't get closed
out
let's say you short sell an asset for
100
but its price moves in the wrong
direction
instead of the asset going down in price
it goes up instead
if that asset proceeds to go up to three
hundred dollars you've then incurred a
two hundred dollar loss which is a two
hundred percent loss on your original
one hundred dollar sale
because of this potential for unlimited
losses short positions have more
inherent risk than long ones but how do
you actually short sell
historically in short selling shares are
usually borrowed from a broker in order
to facilitate the short position you
cannot usually sell an asset that you do
not have on hand
after the assets are required the
borrower then sells them at the current
market price to another buyer
as you take this short position you're
contracted to repurchase the sold shares
within a given time frame in order to
close the short position
after you repurchase the asset you then
return it to your broker and close the
position with either a gain or a loss
it's important to take note of fees such
as this when taking a short position the
same way you would when taking a long
position evaluate if the costs of taking
the trade could potentially
outweigh its returns
[Music]
the principle of short selling is the
same for trading cfds as it is for
institutional investors on other asset
markets the difference is that short
selling the old-fashioned way is much
more restricted and expensive than short
selling cfds through platforms like
capital.com
some of the world's most famous and also
infamous traders have made their names
off the back of short selling
one such example occurred in september
1992 a day that became known as black
wednesday
back then the united kingdom was part of
the european exchange rate mechanism in
order to align its currency with
countries like germany
believe it or not it was seen as a
stepping stone towards the uk joining a
future european currency in after hours
trading tonight the pound continued to
fall crashing through its erm floor
currently it stands at two marks 74.50
that is more than three finnex below its
lowest permitted level
the pound had to maintain its value
above a certain threshold to stay in the
mechanism but due to the state of the
british economy at the time it was
really struggling to do this and then
there were high german interest rates
putting stress on the erm system so the
uk was struggling with a high fiscal
deficit
a high trade deficit and on top of that
high inflation
traders like george soros noticed that
the uk was struggling in this position
so guess what he took out a big short
position against the british pound the
pound began depreciating other traders
alongside george soros began selling
more pounds the shorters were proven
right about the issues for sterling in
the erm and the uk crashed out of the
system george soros pocketed a profit of
one billion dollars from his position
tesla is hitting a new record high
surging nine percent today for its best
day since march and closing in on a
thousand bucks a share we're talking
about a company with a trillion dollar
market cap
one of the highest profile stocks of the
past two years has been tesla because of
its stellar performance
the dominance of tesla and its high
price to earnings ratio has attracted
the attention of short sellers betting
that the tesla icarus is flying too
close to the sun
[Music]
michael bury of the big short flame is
one of many of those short sellers who
has bet big against tesla he bet 530
million dollars against the company in
may 2021
after that period the price of tesla
actually rose peaking in november 2021
at 1
22 a share rising from a position of
around 580
in late may of that year he's not the
only short seller who has lost big on
tesla in 2020 alone short sellers lost
40 billion dollars betting against the
car company it's always important to
remember that short selling has higher
innate risks than taking long positions
most experienced traders will use short
selling as part of an effective trading
strategy
short selling has frequently been blamed
for the decline of asset prices
this is because in a short position
extra shares are sold on the market
if done in sufficient numbers it can
bring down the price of a stock
however regulations such as banning
naked shorts that's shorts where you
have no stock to sell at all have
existed for centuries to prevent
manipulation like this
short selling therefore is a strategy as
old as stock market bubbles themselves
traders who are willing to bear the
possible risks and can see an
opportunity to take a short position on
an asset should not be intimidated from
using this trading strategy
thanks for watching you can read all of
our market analysis on short selling by
visiting capital.com
our recent explainer how markets
performed during past recessions may
also interest you you can watch that by
clicking on the box
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