Wall Street veteran and author of “The Millionaire Dropout” Vince Stanzione weighed in on the flurry of activity and short-selling scandals that have rocked financial markets over the last few months. With the financial media recently laser-focused on stories like the independent retail traders of Reddit and the Gamestop (GME) squeeze campaign, Stanzione addressed what he believes is an unfair characterization portraying short-selling as financially irresponsible and malicious.
“Short selling is the act of selling a stock you do not own, which you have to borrow in the market in the expectation that the price of the stock will decline, before buying the stock back (hopefully at a lower price) and returning the stock to the lender,” said Stanzione. “For example, if I short 100 shares of a stock at $120 and that stock then goes down to $100, I can buy the stock back at less than I paid for it and make a profit. In Europe, Contracts for Difference (CFDs) have been used for over 25 years by professional and retail traders to profit from a range of markets including stocks, indices and commodities. Financial Futures and traded options (put options) have been around for many decades. These allow you to profit or hedge from down movements. The idea of making money from a falling price is not new. Retail customers – especially in the U.S. – tend to shy away from short selling.
Going Short Has a Limited Upside
Stanzione also noted that the maximum potential gain on shorting a stock is 1x, as the most a company can go down to is zero – and that is an extremely rare event. Returns can be magnified with leverage or using a traded option. On the other side, a stock does not have a maximum upside and could easily go up 500%. In theory, there is no limit to the potential losses from being short, so it is important to manage risk and position size correctly. Short squeezes, where rapid and significant upward price moves cause short sellers to cover in mass quantities, can push prices against short sellers.
“Even in a bull market there are always opportunities to profit from falling individual stocks,” Stanzione said. “But overall, the majority of my trading gains remain from being long stocks. Short selling is a bit like driving a car: most of the time you’re going forward, but at times you will need to reverse. We have witnessed a very favorable period for stocks, with many speculative names and SPAC stocks moving based on a lot of hype and rosy expectations – all of which are likely to disappoint. These are the types of scenarios where going short makes sense as a stock returns back to a price in-line with the fundamentals. It’s worth remembering though that markets take the stairs up, but often take the elevator going down. It’s not unusual to see large falls in a stock happen over short periods, especially when things start to go wrong. But I believe the next 12 to 18 months will be a very lucrative time for short sellers.”
About Vince Stanzione
A self-made multimillionaire, Vince Stanzione has been trading markets for over 35 years and is the author of the New York Times Best Selling “The Millionaire Dropout,” along with “Making Money from Financial Spread Trading.” He has been favorably featured and quoted in over 200 newspapers, media outlets, and websites including CNBC, Yahoo Finance, MarketWatch, Reuters.com, Independent, Sunday Independent, Observer, Guardian, The Times, Sunday Times, Daily Express, What Investment, Growth Company Investor, the New York Times, Bullbearings, City Magazine, Canary Wharf, Institutional Investor China, and Shares Magazine.
Vince currently lives on the island of Mallorca, Spain, and trades financial markets including currencies, stocks, commodities, and cryptocurrencies. Learn more about his work at: www.FinTrader.net.