The most often-cited: the mathematical truth that if the market goes against an investor, the loss is theoretically unlimited. Erlanger, chief technical analyst at Advest Inc. Some also consider short selling vaguely unpatriotic - ''a bet against America'' and its economic growth. But, many advisers point out, even if stock prices continue to head upward over time, individual stocks, industries and even the overall market can fall for long periods.
The rise of stock options has also cut the speculative allure of short selling. Investors who want to bet that a stock will go down can simply buy a put - the right to sell a specified number of shares at a certain price within a given period. The only risk is the cost of the put, a constantly wasting asset with a built-in expiration date.
There are also several operational wrinkles that short sellers face. One is that investors generally cannot get a short sale executed on exchanges unless the stock is rising - or at least not declining. That is called the ''uptick'' rule. Another is that if the company declares a dividend while an investor is short, the investor has to pay it. Investors also need to open a margin account with brokers to sell short and have to deposit more money if a shorted stock goes up.
Finally, it is sometimes difficult, particularly with issues of smaller companies, for brokers to find stock to borrow. Despite these pitfalls, short selling has gained some new visibility. On Nov. The N. Because the O-T-C market has no uptick rule, it is sometimes easier to sell short there.
The exchanges, some of which are reviewing their policies but seem unlikely to change them, require upticks so that short selling will not magnify declines in falling markets; the uptick rule, however, does not apply to odd lots - fewer than shares - a fact that prompts some impatient shorts to sell 99 shares instead of If an investor is inclined to sell a stock short, perhaps because a certain company's profits seem to have peaked or because an industry's stocks have been bid up to unreasonable heights, the exchange and N.
They act as gauges, both of investor sentiment and of potential money flows. A big increase in the short interest in XYZ Company, for example, can be a sign that many others hold this pessimistic view. It also indicates that if profits rise instead of fall, there are that many shares that sooner or later must be bought to cover the short positions and probably speed up XYZ's advance. The put strategy also allows you to make bearish bets against indexes and sectors by buying puts on exchange-traded funds that track them.
Why not just short? Buying puts has its advantages over outright shorting a stock -- where you borrow stock from a broker with the hope of buying it back at a lower price and keeping the difference. For one, with puts, your maximum loss is the premium you paid, whereas with a short, your potential losses are unlimited. Another problem with shorting outright is that you can't always do it. Sometimes the stocks you want to short the most are hard to come by, and brokers can't find any shares to lend out.
When you buy a put, on the other hand, you're not on the hook to pay periodic dividends, though anticipated dividend payments do affect the price of the option to some degree. What you consider a "sure thing" could take more time to materialize than the option affords, so be comfortable with the risks you're taking before you place the trade.
To review: Your maximum loss when you buy a put is the premium paid, but that's still cash that you'd otherwise have in your pocket, so allocate it as carefully as you would any other investment. In full appreciation of that risk, buying puts offers you a way to bet against stocks, indexes, and sectors without exposing your portfolio to potentially unlimited losses that you would incur by straight shorting.
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For one, with puts, your maximum loss is the premium you paid, whereas with a short, your potential losses are unlimited. Another problem with shorting outright is that you can't always do it. Sometimes the stocks you want to short the most are hard to come by, and brokers can't find any shares to lend out.
When you buy a put, on the other hand, you're not on the hook to pay periodic dividends, though anticipated dividend payments do affect the price of the option to some degree. What you consider a "sure thing" could take more time to materialize than the option affords, so be comfortable with the risks you're taking before you place the trade. To review: Your maximum loss when you buy a put is the premium paid, but that's still cash that you'd otherwise have in your pocket, so allocate it as carefully as you would any other investment.
In full appreciation of that risk, buying puts offers you a way to bet against stocks, indexes, and sectors without exposing your portfolio to potentially unlimited losses that you would incur by straight shorting. Investing Best Accounts.
Stock Market Basics. Stock Market. Industries to Invest In. Getting Started. Planning for Retirement. Retired: What Now? Personal Finance. Credit Cards. About Us. Who Is the Motley Fool? Fool Podcasts. Tesla Inc. Other companies on the list that may surprise you include Microsoft Corp. MSFT, FB, NVDA, An example of a heavily shorted stock that has been very profitable for Lamensdorf is BlackBerry Ltd. BB, Take a look at the one-year chart:. Shares of BlackBerry began to fly up after the company announced a multiyear deal to provide software for Amazon Web Services.
BlackBerry always had a reputation for excellent network security. BIDU, According to FactSet, 7. Follow him on Twitter PhilipvanDoorn. Economic Calendar. Retirement Planner. Sign Up Log In. Home Investing Stocks Deep Dive. ET First Published: Jan. ET By Philip van Doorn. TSLA Philip van Doorn. How will this wild GameStop saga end?
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