Does Shorting Stocks Make Sense?
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Today we have a little chat around shorting stocks and if shorting stocks makes sense. Many people think shorting stocks is a fairly easy thing to do when they don’t realize the whole game is rigged against them in a massive way.
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Well guys here today I want to take you through shorting stocks, I want to talk about a few should be shorting stocks. Now, if that’s a smart decision shorting stocks, a lot of people kind of hear about an old shorting shares, is that something I should get into?
Is that something I should be interested in? Is there something smarter I could do out there. And so I want to give you my full opinion, around short selling stocks. Now, if you don’t really know what short selling a stock means, essentially, you’re betting that a stock will go down in price.
So think about it in traditional respect of like, like, if you buy Apple stock, right, or you buy Facebook stock, you buy Google stock, or whatever stock it is, right, you’re basically placing a bet that you believe those shares are going to increase in value over time, or hopefully, they’ll pay you a bunch of dividend money or something like that.
But generally, if you’re buying Apple stock, for instance, you It’s because you believe Apple price will the stock price will go up over time, okay, a short position, when you go short shares, you’re literally just doing the inverse, you’re basically making a bet that you.
Believe that stock will decrease in value over the coming weeks, months or years or whatever, you know, depending on your circumstance, and however long out your your kind of respect is in regards to shorting that stock. Alright, so the simplest terms, that’s what shorting a stock is, okay?
Now, when you short, you’re borrowing shares from a brokerage, okay, that you’re going to go ahead and buy back at some point in time, the difference between when you shorted those shares, and what you buy those shares back for, that is what your profit or loss is.
And you could do that at any point in time. Okay, so you could go in, you know, tomorrow and go ahead and short, you know, we’ll just use Apple stock, everybody knows Apple stock, right? You go ahead and short sell Apple stock tomorrow, for instance, from your brokerage, as long as you have a margin account setup, okay, you usually have to have a margin account set up through your brokerage in order to short shares.
So you go ahead and short Apple stock tomorrow, because you believe Apple stock is gonna go down tomorrow, then you can go ahead and buy back those shares the same share shorter, you know, let’s say you short 10 Apple shares tomorrow, you go buy them back tomorrow, if you want to.
And the difference between what you shorted those shares at and what you go ahead and bought those shares back for, that’s going to be the difference in what you lost or made on that investment. Okay. And you could do that for you know, the day or the week or the month or years in the future, it really doesn’t matter at the end of the day.
Okay, so let’s go through a couple scenarios here. So if you short a stock, you know, this is your short stock, ABC, and let’s say the stocks $100 a share. All right, if that stock goes to $150 a share, and you go ahead and buy back those shares, you cover your short position as it’s called.
Okay, you go and buy back those shares, you cover your short position, you get out of that you just lost $50 per share, because the stock went up in price, okay. Now, if you’re long that stock, obviously, you’re doing very well. But when you’re short, that’s not such a good thing. Okay.
But let’s say that stock does go your way the stock has a really hard time they have some bad earnings, whatever happens, okay? Let’s say a stock falls 50% goes all the way down to $50 a share now we’re in a situation where you just gained $50 per share. Okay, so obviously, you know, if you short a stock, you need to go your way, no different than if you’re long, you need the stock to usually go up over time, okay.
Now, keep in mind with going the long shares, you know, some companies pay dividends. So sometimes you can make dividend money still, you know, which even if the stock doesn’t go up, you at least get dividend money with with shorting shares.
There’s no dip in money for years, something like that. Okay, so if you’re shorting shares, like you’re just counting on basically a stock price going down over time. Alright, so now let’s say the best case scenario happens possible, what is the best case scenario that if you shorted stock, A, B, and C, well, that’d be the stock goes to literally $0 a share, okay?
It goes from $100 where you started shortening that and when you go to cover it’s at zero, like literally went bankrupt or something like that, that would be the best case scenario possible for you. And in that situation, you make 100% return on your investment.
So when you go ahead and short a stock, essentially you’re the best case scenario you can have happened for you is you make 100% on that stock, right? And that once again, that means the stock literally went to zero and you got your 100% gain Okay, now you got to keep a couple things in mind and keep in mind these couple things.
I’m gonna share with you this is not even the worst part of this we’re actually going to get into the worst part in just a second. Okay, a couple things to keep in mind here. Number one, the loss is unlimited when you short shares okay? So for instance, let’s say you short stock A B and C stock A B and C can go to $200 a share, stock ABC can go to $500 a share $1,000 a share $10,000 a share.
Okay, so if you short the stock and things start to go really bad, you can literally lose an unlimited amount of money when you short a stock you can literally lose an unlimited amount of money and that is rough. Okay. You know, if you go long shares for instance, okay, if you go long, your loss is limited at 100%. Right?
You buy this stock at $100 a share you buy one share your loss is limited at $100 because let’s say the company goes bankrupt It goes to zero, you just lost your $100. Okay, now hopefully, if you’re buying companies that have great balance sheets, and are very profitable, that should be very unrealistic, right.
But needless to say, you’re you’re basically your loss is capped at 100%. When you short shares, it’s literally an unlimited loss. Now, a brokerage could also force you to cover your shares at some point in time, if it goes really the wrong way or something like that. And you get into a margin call situation or something like that.
Keep in mind, you’re borrowing the shares at the end of the day. So you know, it’s possible, there could be a situation where you were forced to buy back your shares, okay, but neither say short shorting shares, your loss, your potential loss is unlimited, whereas you go long shares, your loss is limited 100%.
Okay, number two, you have to pay interest, when you are shorting stocks, you have to pay interest when you’re shorting stocks. So if I go long shares, and unless you’re going on margin or something like that, but if you have a regular brokerage account, and you go buy some shares of a stock, today, you go buy some shares of.
Apple stock, like you’d like you don’t have to pay interest on that, when you short shares, you generally always have to pay interest. And the interest rate can be different depending on different stocks, I’ve seen it 510 percent plus sometimes when you’re shorting a specific stock out of there, so which means you got to get at least a 510 percent gain, just to break even on what you’re paying in interest per year.
Okay, nevermind, you know, if you’re not getting that, then you basically can lose money. Plus, you have to pay interest in it, so can get really ugly. Okay. Now, keep in mind, this is not even the worst part of shorting stocks. Okay, this is not even the fourth part, those two things that the fact that your loss is unlimited, and also the fact that you have to pay interest. That’s not even the worst part.
Let’s get into the worst part. Now, already, guys, let’s start getting into the worst parts of being a short seller and want to short selling stocks is absolutely usually a horrible, horrible idea, and usually a very unprofitable endeavor. Okay. We already talked about the potential losses Unlimited, we already talked about the potential gain is 100%, which is no fun.
Okay, number three, you have to pay interest. While you’re short. We talked about all three of those. Number four, the market goes way up, way more than down, okay, most years, most weeks, most months, most decades, where does the stock market go? It goes up look at any chart you possibly want out there in the s&p 500, most of the time.
The stock market goes up way more than it goes down, basically, meaning if you’re shorting stocks, or shorting the entire market, in general, you’re just fighting an uphill battle, because you’re you’re fighting against the trend, which is a trend, the market goes higher and higher and higher over time.
Sometimes it dips for a few weeks, maybe a few months, maybe even a year or two. But over the long term, you just pull up a chart of the s&p 500, the Dow 30. It doesn’t really matter the NASDAQ. And what you’ll find is, yeah, sometimes there were some down periods where the market got too overvalued at a particular time, stock prices need to come down or there was a big recession or something like that.
And in those few instances, you could maybe have, you know, successfully shorted shares, but that’s really hard to time the market specifically or even stocks in general. Okay, so you’re fighting an uphill battle. Number five, the government wants an increasing stock market, okay.
All politicians that are in office, they want the stock market go where they want it to go up over time, so they can put that on their record, they say, since I became president, or since I you know, got elected to such and such position.
The stock market has increased blah, blah, blah, percentage or whatever, okay, no one, no one wants to become a, you know, a high ranking official in government, and the stock market decreased over the time when they were in office, right, that’s obviously not a good sign.
So you’re fighting, you know, government officials who, at the end of the day, they want the sock pray, you know, stock market to go up, and they’re probably going to do incentives to try to make the stock market go up over time. And, you know, maybe it could even be things done by the Fed, quantitative easing different programs like that.
Needless to say, you know, once again, you’re fighting an uphill battle, because the government literally wants an increasing stock market over time. Okay. Number six, you’re fighting executives with a lot of very brilliant individuals that want increasing stock prices of their stock. Why? Because a lot of, you know, executives, compensation packages are tied to their stock price.
So if a stock doesn’t do good, an executive can still make money, they would still gonna make their base salary, but they’re probably not going to make much for bonuses. So if an executive really wants to bank money in a big, big way, which all people do, right? There’s not I don’t think there’s any executive out there that says, Oh.
I can make an extra 5 million this year, but I don’t want to Okay, all executives want to make more money at the end. How do they do that a lot of them need to have their stock prices increase. So they’re going to try to do whatever it takes to have those stoc.
They’re going to try to you know, make the net income go up to whatever it needs to sell, the stock price can increase over time, they’re going to try to do buy back shares, they’re going to try to you know, think about different ways of financing deals, they’re gonna do whatever it takes acquisitions.
So that overall that stock price because keep in mind, the executives are basically chosen by the board of directors, the board of directors are chosen by the investors of the company. So if the investors of a company are unhappy, they’re going to elect new board of directors, which means those board of directors are going to get replaced by somebody else and board of directors doesn’t want to get you know, replaced.
They get to make their easy 100 to three 1000 a year for you know, coming to a few meetings and deciding these folks, the executives don’t want to get replaced. Obviously, they want to keep making their millions of dollars and getting those, you know, potential huge beta, you know, payouts there.
So needless to say all these people are fighting for higher stock price and they’re gonna do whatever it takes that friggin overtime those stock price to increase so they can make maximum bonuses. Okay. Number seven companies are usually constantly buying back shares.
I mean, the most companies I know of in probably most companies, I have have actual share buybacks going on right now. Okay, there’s another reason you’re fighting an uphill battle. If you’re shorting stocks, a company can literally use their profits and plow that money and money off the balance sheet, they can just plow that money right back into the stock.
And then you’re fighting an uphill battle of not only could other you know, basically people that are going long shares, ie buying the stock, but then the own company could be plowing 10s of millions, hundreds of millions, even billions of dollars into that stock each month, or maybe each quarter.
And so you’re fighting this uphill battle where you’re shorting shares, you need the stock to go lower, but you have all these things working against you that basically are going to probably make the stock go up over time. All right, Number eight, if that’s not already bad enough, the masses, meaning individuals out there, regular folks are usually constantly flooding money into their 401 K’s there are individual retirement accounts.
Think about it this way. Imagine, you know, there’s a there’s a big company and employees, let’s say 30,000 people, let’s say not everybody there to contribute to their 401k every year, let’s say only half of them do that, okay. And let’s say each of them does 100 bucks a month or something like that, on average for 15,000 people run the numbers on them, that’s a big difference than the pie, right?
That are constantly flooded money, and then think about how many millions 10s of millions of just Americans alone are constantly flooding money into their 401k or their individual retirement accounts. And usually, that’s way more in inflow and outflow over the long term.
And so it’s another reason you’re fighting an uphill battle in this game, guys, you’re fighting an uphill battle, then you think about it, people in other countries, a lot of times they’re trying to invest in 401, K’s maybe in Europe or Asia, Asian different reasons and whatnot that want to invest in the States, they can do so through 401, K’s or individual retirement accounts.
It’s like it’s just a massive uphill battle. Okay. And number nine, let’s say you’re really, really smart, short seller, and you had this company pegged. And you’re like, you’re so smart, okay? You know, the stock is insolvent, they’re going to go out of business, they’re going to become irrelevant.
Their product was a fad, blah, blah, blah, whatever your reasoning is, okay, and you’re like that stock is going to go down the tubes, okay, and you’d like I’m shorting shares, or 10 bucks here, and the stock starts to go down and goes down to $9. And it goes down $8. And the prospects for the company are looking worse and worse than you like, I’m going to kill it on this one, I’m already up 20%, or whatever it goes.
And then it goes down to $7. You’re like, Oh, yes, this company’s going out of business, okay, they’re going to do so bad, the numbers keep coming out, their money’s leaving their balance sheet, they’re doing so bad, I’m gonna make so much. And then one morning, you wake up and company XYZ just bought company ABC that you shorted.
And they just bought them out for $12 a share. And you just say, now you went from you who thought you were the smartest man in the room, you’re gonna make so much money to now literally overnight, the company is going to get bought out, and you just lost a lot of money on those shares.
Okay, so that’s another reason you’re fighting an uphill battle is the fact that any company can basically get bought out at any time, especially if they’re doing that. And the shareholders will likely approve a buyout if they can get a 30% or 50% premium to their shares.
And so you go from a position where Yeah, you were right, that that stock probably was going to go out of business, that company probably was going to go out of business, they were probably not going to stop losing money, they were probably you know, their balance sheet was getting worse and worse.
They were you were probably right, the stock was gonna go to zero at some point in time, but it never got there because they got bought out because somebody else you own saw the ability of that company or you know, they can stream that in the products and bring it to profitability or something like that.
Whatever the reasoning is, it doesn’t really matter in the end, you just went from Oh, you were going to make a lot of money to literally overnight you are guaranteed to lose money. Okay, so basically at the end of the day, if you’re shorting shares and then we’ll talk about.
What’s a better option in my personal opinion the shorting shares is you’re basically fighting against a rigged system against you the system is rigged 100% to go up over time Okay, stocks are meant to go up over time the markets are meant to go up over time. The whole thing is like rigged against you Okay, it’s literally as you know.
I live in Las Vegas Okay, and needless to say the casinos they don’t have one single game where they don’t have the best odds Okay, it doesn’t matter what you go and do at the casino. All the games are rigged more in the houses favor then in your favor as the player Okay, it’s just the way it is.
Okay, you blackjack craps It doesn’t matter what game it is the the slot machines, it literally doesn’t matter. The games are rigged against you. Okay, that’s all those massive buildings got built as they like to say okay, so if you’re shorting stocks, the game game is rigged against you and you’re you’re basically.
Fighting an uphill battle that you’re trying to rig you’re trying to win against a rigged game. It’s and it’s why you see so many short sellers that are so negative all the time, or had that attitude, you know, like, man, why are they so negative, like, it just doesn’t seem like they have a smile and they just so unhappy and things like that.
And you got to understand, if you had a fight against a system that was rigged against you, every day, I would probably walk around with a frown on my it’s like, you can either like, like be on the right side of things, the long shares and probably make a lot of money over time.
Or you can try to fight against the system and fight an uphill battle, and you’re probably going to lose in the end, okay. And it’s just the way it works in this game. Okay. So in my personal opinion, the better option out there, no pun intended, is if you are super negative on a stock.
Or you’re super negative on the markets, in general, generally, the better option is generally to buy put options in a scenario like that now that the the problem of put options is, you know, yeah, you can lose, you know, let’s say you buy put options, here’s the good thing about put options, you can lose 100% of your money with a put option, you buy a put option, you open a position and buying a put option, you can lose maximum 100%.
Once again, you short shares, you can lose, you know unlimited amount of money to you don’t need to pay interest, as long as you’re not buying that put option on on margin or something like that, you don’t have to pay interest. So let’s definitely vary some good things.
Again, short position, the downside is short position, you can keep, you know, open for a limited amount of time, you know, essentially a put option, you do have to put a timeframe on it. So either like next week, or a few months from now, or like a year from now or two years now usually like two years out is usually the furthest out, you can either buy call options, or buy put options.
Obviously, if you’re going negative, usually the scenario is buy put options. And it’s usually a way better option, because you can usually do that with way less capital. And then keep in mind, you’re capping your loss at 100%. You let’s say you buy $1,000 and put options on stock, you know, ABC here, okay, your potential loss is $1,000.
Let’s say the stock goes up and your your options expire worthless, you just lost 1000 bucks, but that’s the most you can lose, if you bought the put, if you short shares and you put you know, let’s say $10,000 into that because you want you know the equivalent, you know, chance of kind of making money, no, your your potential is actually way more than 10,000, you could lose a 10,000.
But you could lose way more than that, because the stock could go up way higher than that essentially. So in my personal opinion, if I’m negative on a stock or I’m negative on the market, in general, what I go to is I buy put options, okay, and I haven’t bought put options in a while.
I bought put options on for a few years ago, I made good money on that I think I made 20 or 30%. And like a month or two time. And that’s honestly the last time I did that that might have been I don’t know, two or three years ago, for all I met like that was quite a while ago.
I usually don’t do it very often. But if I see a scenario where I’m like, I see this stock and I’m like, I’ve got a negative on it. And I have a you know, a good, you know, kind of bearish thesis around it, I’m going to buy put options in it, okay. And that’s just the way it is shorting shares.
That’s way too tough of a fight. And just being negative on stocks or negative on the market in general is way too tough of a fight that it’s so many things that are working against you constantly, that it’s like a never ending struggle, and it’s why you know, it’s not a healthy way to live man.
Being a short seller and shorting stocks is not a healthy way to live is no fun. You get those few like short bursts of fun kind of like you know, you go to a casino and you might just pull the slot and you might win ones right or you might play some blackjack and you might win a few hands and like Dang, you get that short burst.
But guess what happens over the long term generally it’s not going to go your way because you’re fighting a rigged game against you and that’s that’s no fun to do on an everyday basis guys. So my opinion is shorting stocks. Absolutely not a good decision usually in most, you know almost all scenarios if I’m going to do something because.
I’m negative on buying put options. That’s me personally, I want to hear from you guys in the comment section. As always, let me know your opinion down there. As always, thank you for watching. Have a great day.