You might have noticed it in NAGA, when you type on a stock/asset we display a “BUY” and a “SELL” button.
Whilst a lot of people get confused and think “How can I sell if I don’t own the stock yet”?, we want to clarify what the Sell button means and how much you can benefit from it!
🧑💻Short selling (short sale, shorting a stock, going short) is an advanced strategy of experienced traders that use it to take advantage of share prices that are expected to decline/fall.
Conventional investing teaches us to buy shares that you believe have potential for growth - so called ‘going long’, opening a ‘long position’.
Short selling, on the other hand, is a speculation on the decline of the stock’s price; you are selling a borrowed asset when you believe that its price will go down, selling it later to make profit.
This strategy is mostly used on shares, but you can short-sell a variety of financial markets, like: indices, forex or cryptocurrency (where short-selling Bitcoin has become very popular).
“Going short” is a way for traders to benefit off of bear markets or to hedge against any potential negative market movements that they have open long positions in.
📄 When short selling you open positions by borrowing shares and trying to make money on the use of those shares before having to have to return them to the lender.
1. You borrow shares and sell them at a current price
2. You wait for the market to fall
3. You buy those shares at the new price and return them
You don’t actually own the asset you are shorting. If the market falls you can profit off of it, but if it rises, you will have to buy back at a higher price and make a loss.
One limitation of short selling is the fact that you don’t own the asset you trade, so you need someone to lend it to you. It means that you could find yourself trying to trade so-called ‘unborrowable stock’. The alternative way then is to use other products like CFDs and spread bets - those don’t need an exchange of underlying assets which we offer at NAGA.
So you won't have to worry to find a lender, you just decide if you want to “BUY” (Go long, speculate on a rising price) or “SELL” (Go short, speculate on a falling price).
When it comes to CFD trading, the difference of your chosen asset (from when the position opens to its closing) is being exchanged. When short-selling CFD you literally open the position to ‘sell’ the asset.
Let’s say Bitcoin trades at $50,000 and you think the price will go down / fall..
You tap the “SELL” button and short-sell 0.1 Bitcoin using $5,000 of your own money.
Assuming that the Bitcoin falls now to $45,000, you will make a profit of $5,000 * 0.1 = $500. Because: You lent the Bitcoin and $50,000 and will buy it back at $45,000, so you ll keep the profit of $500.
However, If the Bitcoin will rise to $55,000, you will face a loss of $500 as you have to “buy back” the 0.1 Bitcoin at a higher price.
Another way traders use to short-sell is hedging. This method can protect you from losses to a long position. If you’re going long on Apple for example (betting that the price will move up), and you want to secure yourself from sudden price drops, you can in parallel open a short to lessen the negative effect.
➡️ Small initial capital needed
➡️ Leveraged investments are possible
➡️ High profits possibility
➡️ You need account margin
➡️ Short squeezes (asset sharp, high ‘jumps’)
➡️ Potential losses (remember that NAGA protects your funds with Negative Balance Protection)
All in all, Short selling takes the trading experience to a completely new extent, as traders can make money even when the asset drops in price. But unavoidably, it has its disadvantages too. If the price goes up, your losses could potentially be unlimited. That’s when ‘short squeeze’ could occur - a lot of short sellers trying to cover their positions at the same time which pushes the price even higher. That results in even higher losses.
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