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Yeah, short selling is scary: limited upside, unlimited downside. I've been tempted to short some stuff, but have always resisted, because the normal adage of
by username223 9y ago
Yeah, short selling is scary: limited upside, unlimited downside. I've been tempted to short some stuff, but have always resisted, because the normal adage of "don't bet anything you can't afford to lose" doesn't apply.
EDIT: This is not the whole truth; see the replies below. You can essentially buy insurance to limit that downside (via a call option), or put up money that you lose if the shorted stock rises above a certain price (via a margin). I am not a lawyer or a financial advisor. I'm just some internet person.
- ProblemFactory 9y agoI don't think you can actually have the "unlimited downside" at least as a casual investor. Nobody trusts you to be able to pay up for the "unlimited downside", so when you short stock, you are required to provide some collateral. For example USD or other stock held in your trading account. When the price of the stock you borrowed rises enough to match your collateral, you need to either provide more, or it gets used to buy the stock and repay the stock debt. You lose your entire collateral but don't get stuck with unlimited debt. This limits the amount you can lose in total - but actually makes losing some amounts more likely. If you short a stock, but it goes up for a brief while before dropping - then you can still lose your investment at the peak even if you were correct in the long term.
- addicted 9y agoIn practice there is never unlimited downside. You should pair your short with a call option at the very least, so your downside is easily limited.