The Basics of Shorting Stock
Tuesday March 13, 2007
Remember the market crash only a week or two ago? Yeah. It's long gone by now. Many companies have already returned to their then-levels despite the prediction from the financial media that it might be the start of a long, slow slide downward to cheaper equity prices. This is yet another example of how it is 100%, positively, utterly pointless (and impossible) to time the market with any consistency over long periods of time.
One common mistake new investors make is by shorting stocks they think are overvalued. As the great Benjamin Graham taught us, however, there is nothing stopping an already overpriced company from growing even more overpriced (just witness the dot-com boom of the 1990's.) Don't be among those that make this mistake! You're playing with fire and, sooner or later, you're likely to get burned.
But remember, the downside of the market is a very real thing not to lose site of. While there are Bulls, there are also Bears. Shorting the market can be a profitable venture at times. In the options market, it is possible to play Puts with all sorts of strategies for capitalizing on the down trends. Also, it is possible to capitalize on intra day activity where the spread between the high and low on any given stock can yield a nice, quick return.
While theoretically it is nice to be optimistic, people counting on the stock market for additional pension fundsfor example, have been wiped out taking that stance. Therefore for many, timing is everything. It’s not prudent to stereotype by damning the strategy of shorting the market. I should know, I generate more dollars playing puts than calls. I do so because the reality of the market seems to favor it. And that reality is the market’s call, not mine.
Shorters destroy any trust in the market