To The Moon

🌟🌟🌟Is short selling a good strategy in a downtrend?  For those who are new to investing Short Selling involves borrowing a security whose price you  think is going to fall and then selling it on the open market.  You  then buy the same stock back later, hopefully for a lower price than what you  initially sold it for, return the borrowed stock to the broker and pocket the difference.

For example let's say Stock A is trading at USD 50 share.  You borrow 100 shares and sell them for USD 5000.  The price of Stock A subsequently drop to USD 25 a share, at which point I buy 100 shared to replace those you borrowed, netting a profit of USD 2500.

Short selling may seem straightforward but it involves taking considerable risk. 

What are the risks?

There is a potentially limitless loss.  When you short a stock, its price can keep rising.  In theory that means there is no upper limit to the amount you have to pay to replace the borrowed shares. 

Losses for short sellers can be particularly heavy during a short squeeze.  This is a situation when a heavily shorted stock unexpectedly rises in value, triggering a cascade of further price increases as more and more short sellers are forced to buy the stock to close out their positions.  Each wave of purchases causes the stock price to surge higher, hurting anyone holding onto a short position. 

A good example is $AMC Entertainment(AMC)$  in 2021 during the height of meme stock frenzy.  AMC started the year at USD 2 per share and it skyrocketed 36 times to an all time high of USD 72.62 on June 2021.  Fast forward to last Friday, AMC is now trading at USD 3.01.  It has dropped 19% in the past 5 days and a huge 50% year todate. In 2023, AMC has dropped 92%.

Another good stock for short selling is $Faraday Future Intelligent Electric Inc.(FFIE)$  has dropped 8.3% last Friday and in the past 5 days, it is down by 20%. Faraday Future has plummeted 86% year todate and is down by  99% in 2023.

Would I dare to short sell these 2 stocks?  The answer is definitely a No.  As a risk adverse investor, I will stay clear of AMC and Faraday Future.  I would prefer to buy and hold good quality stocks like $Microsoft(MSFT)$  and $Alphabet(GOOGL)$ 

Short selling maybe a good strategy to some investors who love the thrill of high risk high reward.  As for me, investing is a slow and steady process.  Good investing to me requires patience and time in the markets to allow the magic of compounding to happen. 

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