Time and again, I see private investors trying to make money with falling prices. Often these are investors who have little experience on the stock or bitcoin market. However, this so-called “short trading” or “going short” is in my opinion absolutely not for beginners (what does short mean?).
Speculating with falling prices is much more for more experienced traders who know exactly what they are doing. I will explain in a moment why stock exchange dummies should better keep their hands off short trading. Before I do that, a few explanations for the ignorant.
How can one “go short” and thus profit from falling prices?
Basically, this is done via stock or bitcoin market bets. With a “short bet” you win when prices actually fall and lose when prices rise. Various financial products offered by the banks serve as “betting slips”. First of all these:
Short selling: This option, also known as “short selling”, can be used to shorten shares, for example. If a shorted share falls by about -3%, then you have made a +3% profit. The most popular brokers where this trading strategy is used for bitcoin are shown on BBB.
Here I explain the short selling principle in more detail: What is short selling?
Short derivatives: When trading with bitcoin or Forex, CFDs, leverage certificates, futures and warrants, among others, you can also bet on falling prices. These financial products are derivatives. Investors win when the underlying of the respective derivative falls. Example: With a Dow Jones short certificate, investors speculate on falling Dow Jones prices and only make profits if the Dow Jones falls (in this example, the Dow Jones share index is the underlying).
Definition: Long Position/Short Position – What does that mean?
You may have heard or read the following statements regarding the stock market: “Go long” or “go short” or “…XY long/short position opened”.
But many newcomers, who are not yet very familiar with the stock market, only understand the meaning here and ask themselves: What is meant by this? What is this long and short? I try to give a definition that is as understandable as possible:
1. explanation on “long”: investors who go long and therefore open a long position try to make profits with rising prices. So if you buy a share, you are invested long because you hope to make profits when share prices rise. But you can also go long indirectly. This can be done with derivatives (definition) such as warrants and leverage certificates (note: many derivatives are very risky and only something for experienced investors!) When the underlying assets (which can be shares, commodities or indices, for example) rise, long derivatives gain in value.
2. explanation of “short”: Now it becomes interesting. Because many people who are not familiar with the stock market may think that all investors only make losses when prices fall. But this is not the case. If you go short and open a short position, you can make a profit when prices are falling (but if prices are rising, you lose with a short investment).
Short trading is like a long investment with shares directly and derivatives indirectly:
Short with shares directly: this is called “short selling” or “short selling”. Here you sell shares that you do not yet have. This can be explained simply with an example: Investor A believes that share XY will fall in the future and therefore conducts a short sale at a price of 50 Euros. The share then actually falls to 40 euros. Investor A now closes this short position and he has made a profit of +20%.
Attention: Instead of “long” you sometimes say “call” and instead of “short” you also say “put“. Simply put, the technical terms call/put mean almost the same as long/short, but the terms are mainly used for the financial instruments options and warrants.
Examples: With a Dow Jones call warrant you earn money when the Dow Jones rises (but when the Dow Jones falls, you suffer losses). With a Dow Jones put warrant, you earn money if the Dow Jones falls (but if the Dow Jones rises, you suffer losses).
One more thing: Many an expert, who perhaps reads this article by chance, will now say: But there is also something like “long put” and “short call”. Yes, that is true. But that’s another story, and an explanation would, in my opinion, confuse many a beginner. Therefore I will not go into this point any further now ;-).
Caution: Short trading is dangerous!
Making money with falling prices seems tempting, especially when the overall market (explanation) is just falling. But with shorts you can lose a lot of money if you speculate. And that can happen quickly. Especially (inexperienced) investors, who overestimate their investment capabilities, often suddenly find themselves with a high loss. Primarily leveraged derivatives (what is a leverage derivative?) are very dangerous here and often carry a high risk of loss.
Don’t forget that there are plenty of other possibilities for bitcoin gains in one or the other way as you can find on Luckycoiner, so you don’t necessarily need to try your luck with trading.
Short selling is also riskier than it may appear at first glance: On the one hand, the possible loss can theoretically be infinitely high, because a share can rise indefinitely (with a normal purchase of a share, you can “only” lose a maximum of 100%). On the other hand, one is often dependent on certain short selling conditions of the bank. For example, a short selling position may only be valid for a few days. It is therefore important to always be aware of the respective regulations and the possible (unpleasant) consequences that may result.
Beginners should not underestimate the lurking dangers of short trading and should best avoid this type of investment altogether (please avoid leveraged financial products in particular!). However, more experienced investors should also consider carefully whether they really want to speculate with falling stock prices and approach the matter with caution.