The stock exchange is mainly associated with earning increases in share prices. But what if the market is going through an extended bear market? Then we can try to play the dips by short selling or, in other words, short selling. Let’s check out exactly this investor style and what financial tools to use for ‘playing short’.

At its core, exchanges were used by companies to find funds for further development. This was done by selling shares to investors who believed that the company had a bright future, which would raise the price of its shares.

In this regard, little has changed on the stock exchanges – year after year, more companies are entering global stock markets for financing. But on the part of the investor, much has changed, especially due to the emergence of new financial instruments. Many of them are used for speculation, including short selling.

It is not worth thinking of speculation as a new invention. He wrote the first book on the subject in 1688 (“Chaos for Chaos” by Joseph de la Vega). However, the markets are currently many times more speculative due to the virtuality of orders, investment machines, the wide availability of derivatives and leverage (i.e. the hypothetical increase of the funds available to us).

What is a stock short sale/short sale?

Conventional investing is buying stocks at a cheaper price, selling them at a higher price over time and earning a profit. Such an investor depends on an increase in stock prices, and when they fall, he will suffer a loss.

Short selling is based on the opposite rules – we make money when prices go down . How is that technically possible? By borrowing shares from a brokerage firm, financial institution or other market participant, and then selling these securities on the stock exchange, in the hope that at some time their valuation will drop. When it falls, the investor will buy these securities from the market at a cheaper price and return them to the original owner. The profit will be the difference between the starting price and the final price. However, if the stock price goes up, the short selling player will suffer a loss.

Example of short selling

To better explain gameplay briefly, let’s present it with a suitable example.

An investor expects, for example, that Tesla will show poor results in a certain period, which will have a negative impact on the valuation of its shares. To take advantage of this opportunity, the player borrows 10 Tesla shares for $1,200 each from another market participant and sells them on the exchange.

After a few months, the price of Tesla’s stock drops to $1,000 and then the investor decides to buy it off the market and return it to the rightful owner. Shorter, thanks to the correct prediction of the inheritance in the company of Elon Musk, earned $ 2000. This amount will be reduced, of course, by the brokerage commission and the cost of the equity loan.

Because, as we already know – the investor uses the short selling gains from the dips, but what about the entity that borrows the shares until the whole process is done? This should be rewarded – usually the cost of such a loan varies from 1 to 10%.

Playing in downturns is certainly more risky than pro-growth investing, because the potential loss can grow indefinitely . How is this possible? When we play for winnings, we will lose max 100% (when the value of the company’s stock reaches zero). When we play lower, the stock price may continue to rise and we will have to buy back the more expensive securities at some point. The money that went to GameStop knew this bitterly. When the stock price skyrocketed, they were forced to purchase 1,000% more expensive securities, which caused further price gains.

What financial instruments can we use to sell?

Shorting real stock borrowing is common (especially in the US), but derivative shorting is becoming more common. Mainly because it is a cheaper and more convenient solution, as there is no need to pay for stock borrowing. Although in return there is, among other things, a fee for holding positions.

So what are the opportunities that we can take advantage of when we want to play in the face of rejections?

Classic short selling of stocks

The classic form of borrowing stocks to sell them at a profit. Although such an opportunity to trade in WSE appeared in 1999, it is not very popular in our country. Included because there is no specialized short selling platform available overseas. The WSE Board of Directors is planning to introduce such facilities which will help to connect the two sides of the market (share and borrow shares), which will certainly stimulate this type of securities trading.

It is difficult to find short selling accounts at Polish brokerage firms. DM Santander Bank Polska is an exception here, but the number of short companies is small (about 20), and short-term selling is only possible for one day …

Of course, when we have large resources, we do not have to use ready-made financial tools. We can contact a brokerage house, fund or other financial institution to request a share loan for a certain period.

When we have more money, there is a chance that a certain financial institution will create a special financial instrument for us that will allow us to sell stocks or other assets. So did Michael Perry, immortalized in “Big Short,” who decided to play against the frenetic mortgage market just before the 2007 financial crisis.

Futures

This type of trading allows you to play up and down and is not limited to stocks. There are also futures contracts for indices and raw materials. In the case of this investment, there is no real asset exchange – contracts are derivative instruments, so they only reflect the price of the underlying asset, such as gold prices, Orlen shares or the NASDAQ index.

Investors are betting with each other on the direction the asset’s price will go. In such a pair, one side plays on increase, and the other on decrease in price. Therefore, someone from this pair will always lose . Contracts are settled on the day the contract is executed, however, it is possible to close the position early.

Futures contracts are available from most Polish brokers. However, it is worth remembering that this is not a very cheap form of trading due to the need for a high level of security. However, unlike the classic short selling, it is possible to use leverage, which will allow you to make a profit (or loss) several times higher.

Do you want to learn more about futures contracts? Read our article: What are futures contracts and how do they work?

Turbo . Certificates

It is only available at the ING Bank Śląski Brokerage House. They allow you to play on the increases or decreases in the prices of selected stocks, indices, bonds, commodities and currencies.

Contracts for Difference

By far the easiest way to play for a short time is to use CFDs. These are contracts for difference, i.e. a type of bet on the direction in which the price of a particular asset will go. But how are CFDs different from futures contracts?

It is not listed on the exchange and the other party to the transaction is the broker itself. To take a short position, all you need is one click on the investment platform and get the right security . However, it is not as high as in the case of futures contracts. Some play briefly, even in the minute cycles, and others hold the position for several weeks.

Just remember that holding a position costs money, and when the price goes up, instead of going down, the broker may ask for a higher security. Fortunately, the so-called stop losses.

Investment platforms such as XTB or eToro specialize in CFDs. The most interesting CFD brokers are presented below.

Last update date: March 7, 2022

The ranking is created according to the frequently selected offers

		–	worker ? CFDs available on US bonds, costs depend on the specific instrument Bond trading commission	0% ? 0% commission on monthly sales of €100,000. Transactions exceeding this limit will be charged 0.2% (minimum €10) commission. Stock trading commission	0 euros or 10 euros ? PLN 0 if at least one transaction has been opened for 365 days or there are no funds in the account, if not opened Account management	424 people chose this offer ” Check “ ⊕ Add to Compare ⊖ Remove from comparison
eToro – Investment Account		Polish zloty 0 ? PLN 0 (only for clients of eToro Europe Ltd and eToro UK Ltd and does not apply to short or leveraged transactions in stocks) Commission on index contracts	–	Polish zloty 0 ? PLN 0 (only for clients of eToro Europe Ltd and eToro UK Ltd and does not apply to short or leveraged transactions in stocks) Stock trading commission	Polish zloty 0 ? You can join eToro for free – every registered user gets a free $100,000 demo account. However, like all online platforms, eToro charges different spreads and fees on certain trades and payments. Account management	178 people chose this offer ” Check “ ⊕ Add to Compare ⊖ Remove from comparison	67% of accounts that invest in CFDs lose money
		Polish zloty 0 ? When you trade indices, TMS Brokers does not charge any fees for holding overnight indices (there are no funding costs, such as SWAP). This is very good news for investors in the medium and long term. The only cost is the spread, which is the difference between the buying and selling price. Check price differences in stock indices in TMS view. Commission on index contracts	–	0% or 0.19% ? 0 PLN Commission on foreign exchange 0.19% or minimum. PLN 5 commission on WSE Stock trading commission	Polish zloty 0 ? Only bill charges may arise if there has been no account activity for 12 consecutive months. Then the account maintenance fee will be PLN 9 per month. Account management	76 people chose this offer ” Check “ ⊕ Add to Compare ⊖ Remove from comparison

The offered financial instruments, especially those that are leveraged, carry the risk of experiencing losses in excess of the invested capital.

One of the so-called hedging investor strategies , i.e. attaching short sales to the shares of the same company whose securities we hold in the hope of an increase. How it works? We have a block of stocks and we feel that their valuation will go down in the coming period, but we don’t want to sell them yet. In this case, we may decide to play on dips in this company’s stock, using the sale of borrowed securities . Such a tactic may allow us to cut our losses during a market downturn.

When is it worth taking a short position?

Of course, the short answer is – this is when we think the price of the asset will go down. But how are these moments?

• When the entire market or the stock is overheated and we are dealing with a multi-month price rally or a long-term dynamic uptrend. The rules of the stock market teach you to follow the trend, but at certain points the prices are already unnaturally “inflated” to the point that instead of buying shares on a hill, it is better to short them.
• When the facts come out – a common phrase on the stock exchange is buying gossip and selling facts. what do you mean? Stock prices drive issues such as the future, expectations, insights, and perceptions. The unknown is more tempting. Therefore, some positive news or events is often already priced in – and when things really come true (they do come true), it is ironic that stock prices go down.
• When the company has bad press – if feelings about the company change (as was the case with CD Projekt), it is worth thinking about playing for a while, and not counting on higher prices again.
• When others are sorting When we know a company is under sorting fire (thanks, for example, the KNF Short Sale Register), we can relate to that direction ourselves. Large investment funds, staffed by the best in the industry, usually play for a short time, so you can copy their moves.

Selling securities as part of a short sale is only possible for companies that score well in the WSE stock liquidity rating. These are the companies that are of great interest among investors. If short selling is also possible for small companies, it could have a speculative effect on the valuation of their stock.

And when is it better not to fail?

It will be easier to answer when the opposite is true of what we just mentioned. However, let’s list some cases when playing for a short time is definitely not recommended.

• If the share price of a particular company drops sharply .
• When there is an optimistic outlook for the company – for example, it plans to launch a new product or enter other markets or the company is preparing for a merger.
• When we deal with optimism in the stock market, the bull market only accelerates .
• If a company’s stock is purely speculative and the price bounces back and forth. In this case, there is a risk of having to close the position, which will lead to a loss.

Short term risks

The biggest risk, of course, is that stock prices will rise sharply, which will result in a huge loss for the sorter.

Another serious problem is the so-called recall, which means that the owner of the stock can call us for immediate surrender at any time , which can also cause a huge loss. Recall, however, that it deals only with classic shorting.

Short selling is also associated with risks mentioned by Alexander Elder (Professional Investor). The game briefly contrasts with the long-term bullish trend in the stock market. Every investor should remember this.

The final threat is legislation – short selling is often accused of badly affecting the financial market, which is why individual states are considering banning it.

What is KNF’s short selling history?

In the context of short selling on the Polish Stock Exchange, we should also mention the short selling record maintained by the Polish Financial Supervisory Authority. What is that? The Polish Financial Supervisory Authority must show in its record all short positions in which at least 0.5% of the company’s shares participated.

The most popular in the table are US funds that have the means to achieve a strong shortfall.

Short selling controversy

غالبًا ما يُتهم البيع على المكشوف بالتأثير سلبًا على السوق المالية وسحق أسعار أسهم الشركات الواعدة. في الواقع ، غالبًا ما يكون التقصير بمثابة نبوءة تحقق ذاتها . إذا بدأ صندوق ما في اللعب لفترة قصيرة ، فقد ينسخ الآخرون تحركاته ، مما سيؤثر سلبًا على استقبال شركة معينة.

هناك مشكلة أخرى تتمثل في النفوذ الهائل (أي الرفع الافتراضي لمعدل الاستثمار) لسوق البيع على المكشوف ، والذي يمكن أن يزعزع استقرار شد الحبل المعتاد بين العرض والطلب ويؤدي بالسوق إلى ضلال المضاربة. في بعض الأحيان تكون هناك مواقف سخيفة حيث يتم بيع الأسهم على المكشوف أكثر مما هو متداول بالفعل.

However, it must be remembered that thanks to speculators and investors playing on the dips, the market is more lively and liquid . What are the advantages of long-term investors who can find the other party to the transaction at any time. In addition, the short sale is earned by issuing a guarantee loan. This income may be similar to what has been earned through bonds or dividend companies.

sources:

Sheikh, Alexander. 2011.  Selling and selling the new short .

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