Explainer: From Gosling to GameStop, ‘shorting’ is having a moment. But what exactly is it? | mil_l1on
With local and global sharemarkets under serious pressure amid fears of a recession, many retail investors are considering adopting short-selling for the first time.Matt Leibowitz, chief executive of low-cost share trading platform Stake says he has seen a significant increase in people looking to short over the past year, as the value of high profile tech stocks starting falling.
The risk for you, as the short-seller, is that you’re wrong about an asset being over-rated. If you get it wrong, your losses are theoretically limitless. Why? Because if you’ve promised to give your friend back their Company X share in a week, sold it and during that week the value of Company X shares skyrocket, you still have to keep your promise.
Short-sellers such as Burry foresaw the collapse and made money by betting against something that too many investors had too much confidence in.Credit:In Australia, it’s legal to engage in shorting of shares as long you have an agreement in place that guarantees you’ll have the assets you’re intending to sell –the right to give your buyer title over the product – when you go to sell them. That’s called “covered short selling”.
If they all rush to try and buy the asset at the same time, the value of it goes through the roof. And the longer you wait, the worse your losses might get. Many brokers do allow retail traders to take out derivative contracts that give them exposure to short positions. These include contracts for difference, or CFDs, which allow users to speculate on the price of shares, commodities and currencies without ever owning the underlying asset. ASIC has repeatedly warned about CFDs and last year capped the amount of leverage retail investors can use in them.
If, however, the price of fuel decreases to $1 a litre as you’ve predicted, the shipping company loses out because they now have to buy the fuel from you, even though it’s more expensive than it would have been without the contract. But good news forBut hang on, would you want to be making these deals?
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