One way to make money on falling stocks is to sell short (short selling, short selling). Short selling is a fairly simple operation: a trader borrows shares from a broker, sells them on the exchange, and then, when they fall in price, buys them back and returns them to the broker.
Short sellers bet that the shares they are selling will fall in price. If the shares actually fall after the sale, the seller of the shares buys them back at a lower price and returns them to the broker. The difference between the selling price and the buying price is the seller's profit.
Key points
- Sellers are betting that the stock will fall in price.
- Short selling is riskier than going long because there is theoretically no limit to the amount you can lose on this trade.
- Speculators go short to profit from declines, while hedgers go short to protect profits or minimize losses.
- Selling short over a short period of time can provide an investor with good profits, since stocks tend to lose value faster than they rise.
But what next?
Then everything will calm down, the viruses will pass and people will again stop Googling “how to make money from the fall of the ruble.” They will forget their horror, forget all the conclusions made (and not made) and return to their not very luxurious life, only to face another fall again, very soon.
And this article, written in 2014 when the ruble fell by 2 times and seriously rewritten in 2022 on the viral fall of the ruble by 1.5 times, will live on and make good money. With great pleasure I will add to it when the ruble collapses again, flies over 100 and we meet again here, on the ruins of our beloved national currency)
Until we meet again, dear ruble fire victims and my deepest respect to the seasoned speculators who once again cut down green money from Kamaz this coronavirus spring.
Love and hugs to you all.
How to make a short sale
You can sell a stock short through your broker, where you have a brokerage account. This is done in the trading terminal that you received from the broker (QUIK, TRANSAQ), or by calling its traders. You can only short shares that you do not have in your account. If you bought 1,000 shares of Gazprom and you want to short 700, then in this case the broker will simply sell 700 of your shares and 300 shares of Gazprom will remain in the account.
The mechanism for shorting a stock is roughly the same as selling an existing stock. You find the required share, open the “enter order” window and place the required number of shares for sale. Since you do not have them in stock, the broker will automatically lend them. You can only short stocks that are Blue Chips. A complete list of stocks available for short can be found on the broker's website.
The selling price can be set slightly higher than the market price or sold immediately at the market price. Check again that the “Enter Application” window is filled out correctly and click “Yes”.
Short order
After the order is executed, you will have a position with a minus sign. If you shorted 1,000 shares of Sberbank, then your account will have a position of -1,000 shares of Sberbank and the money received for selling the shares. This money cannot be withdrawn from the brokerage account, as it is collateral for your position and will be used to purchase Sberbank shares in order to return them to the broker.
The money generated in a brokerage account by shorting a stock can be used to create hedging strategies. Let's say you decide that Sberbank shares should fall and Norilsk Nickel shares should rise. By shorting Sberbank shares, you can use the money received to buy shares of Norilsk Nickel. In this case, Norilsk Nickel shares will serve as collateral for a short position in Sberbank shares.
Closing a short position is carried out by simply purchasing the required number of shares. Purchased shares are automatically returned to the broker. The difference between selling and then buying shares is the financial result of your transaction.
To close a hedged position, you must first sell the shares you bought long, then buy back the shares you shorted. If you simply buy back shorted shares, then your own money may not be enough to hold a long position and the broker will automatically lend the missing amount.
Shares of foreign issuers
These assets, traded in rubles, can be purchased on the St. Petersburg Stock Exchange, where many issuing companies are represented, and, more recently, also on the main Moscow stock exchange.
The riskiest option in this case is purchasing shares of foreign companies. The difference with ETFs is that the investor will have to worry about independently selecting issuing companies, and for this it is necessary to know at least the beginnings of fundamental analysis.
For those who are able to assess the financial condition of issuing companies, V. Vereshchak advises spending time searching for reliable foreign companies that, for some reason, are undervalued in foreign markets. The securities of these issuers are denominated in the corresponding monetary units (euro, US dollar, British pound, etc.). In the future, in addition to receiving dividends and benefiting from the likely fall of the ruble and differences in stock prices, such assets will help increase the reliability of investments, as well as reduce commissions and tax burdens (for example, avoiding the US inheritance tax for non-residents).
Example of short selling
The trader believes Tesla (TSLA) stock is overvalued at $965 per share and is set to fall in price. He can borrow 10 shares of TSLA from his broker, then sell them at the current market price of $965 on the exchange.
If the stock falls to $400, the trader can buy 10 shares back at that price, return the stock to his broker, and make a net profit of $5,650 (9,650 – 4,000). However, if the price of TSLA rises to $1,100, the trader will lose $1,350 (9,650 – 11,000).
Will the ruble exchange rate continue to fall? How long will this last?
“Yes” to both questions. It will be and yes - it will be for a long time. The issue here is not even about sanctions, not about oil and viruses, but about the economy itself. Even before all this mess, the state of the Russian economy left much to be desired.
The weaker the economy, the weaker the national currency - this is elementary. And you don’t need to be an associate professor at an economics university to understand this simple truth.
This is why you should remember for the future:
A dollar will inevitably cost more than 100 rubles
This event will happen. The ruble is almost there. He has been going there throughout his entire history, starting with Yeltsin. And he will get there. Maybe in a year, or maybe in 5, but he will be there. That is why…. do not wait. And as soon as the ruble temporarily strengthens, start buying dollars for your stash .
Cash, beautiful dollars. Because this is the only way you can save money in this country. Only and exclusively so. Buy dollars, friends and girlfriends. Buy $.
Risks of short selling
Short selling involves increased risk. When an investor buys a stock (goes long), he can only lose the money he invested. So if an investor bought one share of TSLA at 965, the most he could lose is $965 because the stock can't go below 0.
When a trader goes short, he can theoretically lose an infinite amount of money because the stock price can rise forever. In some cases, traders may even lose their own money and remain in debt to the broker.
Similar to the example above, if a trader had a short position in TSLA and the price rose to $5,000 before the trader exited the position, he would have lost $4,035.
Conclusion
Profiting from a market decline through short positions is an increased risk that can only be justified if the investment portfolios are properly distributed. If we are talking about trading during a global crisis with a predictable drop in the value of an asset, then such orders can work in favor of the trader. But even in this case, income can be obtained only if the correct short-term forecast is based on deep information and technical monitoring.
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Why traders open short positions
Short selling can be used for speculation or hedging. Speculators use shorting to take advantage of potential declines in a single security or the market as a whole. Hedgers use this strategy to protect profits or reduce losses in a portfolio of securities.
Experienced traders and institutional investors often use short selling strategies for both speculation and hedging. Hedge funds are among the most active short sellers and use short positions in individual stocks or sectors to hedge their long positions.
Short selling provides an opportunity for speculators to profit in a declining market, but these strategies should only be used by experienced traders and advanced investors due to the risk of large losses.
The essence of shortening
In this article I will consider a bearish game regarding a private trader (individual) on the Moscow Exchange. The trader has an agreement for brokerage services on the stock exchange with a professional market participant (broker) and trades with personal funds.
A separate area is a dealer working short on Forex. The transaction mechanism is the same. We borrow securities, borrow futures from a broker, and buy them back at a lower price level after a decline. If you are unlucky - higher at a loss.
When to open short positions
Short selling is not a strategy that most traders use. Although the stock market has periods when stocks decline sharply, over the long term stocks rise in value.
For investors who are used to holding assets for a long time, buying stocks is less risky than going short.
Short selling makes sense if the trader believes that the stock may fall in the short term. For example, if a company is experiencing difficulties and may default on its debt obligations.
Ideal conditions for playing short the market
When it comes to short selling, the timing of the position is critical. Stocks tend to decline much faster than they rise, and long-term gains in stocks can be wiped out within days or weeks by bearish market sentiment and panic selling.
When opening short positions, a trader must bring the time to enter a trade to an almost ideal level. Entering a trade too late can result in lost profits since most of the stock's decline has already occurred. Entering a trade too early can make it difficult to maintain a short position due to the costs associated with servicing the margin position and the potential for losses that will escalate if the stock starts to rise in price.
There are times when your chances of making money on short selling increase dramatically:
Bear market
If the stock market is in a bearish trend, then traders who believe that “the trend is your friend” have a better chance of making money by shorting during a bear market than during a strong bullish phase of the market. During a bear market, the decline is fast and deep - much like the global bear market of 2008-09. During such periods, bears can make big profits.
Deterioration of economic indicators
Stock fundamentals can deteriorate for a number of reasons - slowing profit growth, increasing business problems, rising production costs.
Deteriorating fundamentals may be indicated by weak statistical data, slowing economic growth, adverse geopolitical events or bearish technical signals.
Experienced sellers prefer to wait for confirmation of the bearish trend before opening bearish trades. This is due to the risk that, despite deteriorating fundamentals, the market may continue to rise for several weeks or months. This usually occurs in the final stages of a bull market.
Technical indicators confirm the bearish trend
Short selling has a high probability of profit when a bearish trend is confirmed by several technical indicators. These indicators could include a breakout of a key support level or a bearish moving average crossover (when the 50-day moving average falls below the 200-day moving average).
If the current price breaks the moving average, either down or up, it could signal the start of a new trend.
Foreign currency
The most obvious option, which almost everyone turned to. Buying foreign currency is one of the most popular ways to save and increase capital. Most compatriots purchase currency at bank exchange offices. However, this option is not optimal for several reasons: a higher exchange rate compared to that established by the Bank of Russia, a large spread between the purchase and sale prices, as well as a limited supply of foreign currency in certain banks (it quickly runs out during periods of high demand).
Experts advise purchasing currency on the Moscow Exchange market. By choosing this option, you will not have to waste time in queues and incur losses when making a purchase on favorable terms for the bank - you just need to open a brokerage account. The main advantage will be the purchase price, which on the exchange is closest to the actual market rate. This way is much more profitable than purchasing dollars at an exchange office with a markup of up to 2-3 rubles. Just don’t buy a currency in the wake of panic at the moment when the price reaches its peak. And do not forget that this method is suitable for large amounts, because... No one canceled the broker's commission for servicing the account and the operations themselves.
V. Vereshchak calls investing in foreign currency the simplest and most reliable way to make money on exchange rate fluctuations due to the absence of third-party factors that determine the financial result. However, it is worth remembering that forecasts on the foreign exchange market are not accurate. The expert advises taking into account fundamental factors and not exchanging money that will be needed in the near future. V. Vereshchak recommends purchasing currency through an exchange broker.
A. Yankovskaya argues that those who regularly (that is, monthly or at least quarterly) buy currency have a chance to win on exchange rate differences. Even with the subsequent opening of foreign currency deposits over the past 12 years, they received more than 2% of real returns (unlike fans of the ruble - they managed to earn no more than 0.17% taking into account inflation).
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