Short selling. Short selling? Yes! Short selling-- the strategy that's long been used by investors to profit from a decline in the price of a security( like stocks, bonds, and derivatives). This controversial investment tactic has been making headlines recently, as short sellers reportedly made a jaw-dropping 7 billion dollar profit amid the banking turmoil. This figure has sparked a debate weighing the potential risks-to-rewards of short selling.
Recently, short sellers made significant profits by betting against banks during economic uncertainty. With Credit Suisse, First Republic Bank, and Silicon Vally Bank practically covered in corkboard panels and a taped note scrawled in frantic pen, "Pardon our dust! We are currently getting help; we'll be fine!" while construction workers with a blue JP logo on their vest carry comically large dollar-sign bags barge through-- uncertain and tumultuous times are most definitely upon us.
Critics argue that it can fuel market volatility and exacerbate stock price declines. Short sellers may create a 'self-fulfilling prophecy' by betting against a stock,* potentially dooming the company to fail artificially. Additionally, short selling can be risky for individual investors (ah, it could affect you!), as it requires a deep understanding of market dynamics and risk management.
Pictured above: an example of a recent stock short. Uh oh. CEO Tom Siebel of C3.ai is getting pretty heated over a short by Kerrisdale Capital which caused his company's shares to plunge 38% in the past few days. Shorting is not pretty-- and not very nice. KC should give C3.ai an "I'm sorry I shorted your stock and caused your company to go into a downward spiral" apology card.
Despite these concerns, short selling remains a popular investment strategy among institutional investors and hedge funds. In fact, proponents argue short sellers play a valuable role in the market by providing liquidity and exposing overvalued stocks. I mean, look at these numbers!
Pictured above: Every long-term investor's nightmare-- an extreme example of what a shorted stock returns in profits due to bets and short-term 'meme' investments.
Unfortunately, as I subtly hinted before-- short selling is not a suitable investment strategy for everyone. If you're considering short-selling, you'll need quite a bit of cash to make a profit. There's a reason only hedge funds and big-name investors are investing in these shorts: they already have a million or a few to throw away, which, when turning even a tiny profit, brings back a couple of million dollars more back into their portfolio (if everything goes to plan, of course).
Short selling is also a very complex fundamental investment strategy that can be lucrative and very, very risky, requiring knowledge and years of experience to indeed 'game' the market.
*one perfect example is CVNA (Carvana), trading at a short float above 60%. They trade now at around ten dollars per share, but when traders shorted the stock back in 2021, shares sold for roughly 380 bucks a pop. In later posts, I will delve further into "meme stocks" and strategies that have been causing a stir in the otherwise traditional market.
My special secret sauce (sources):
https://thehill.com/business/3905734-heres-why-the-too-big-to-fail-banks-bailed-out-first-republic/https://www.cnbc.com/2023/04/06/short-sellers-made-7-billion-in-profit-from-banking-turmoil-ortex.html
https://corporatefinanceinstitute.com/resources/capital-markets/self-fulfilling-prophecy-examples/
https://www.investopedia.com/terms/s/shortselling.asp
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