If you stick around Wall Street long enough you will begin to detect a massive double standard and short selling is at the heart of it. 

Let me explain. 

Every day, prices go up and prices go down.  Yet on Wall Street we are conditioned to believe that you can only make money in a market from prices rising.  Even worse, trying to learn about how to make money from falling prices is discouraged and shrouded in a mystique which makes short sellers almost seem criminal.   

I want you to think about the worst trades you have ever made.  Chances are that you bought a stock, and it went down in price.  Maybe it went down a little.  Maybe it went down a lot.  But on the other side of you losing money was the strong possibility of a trader, on the other end of the transaction who was making the money you lost. 

The purpose of this article is to demystify short selling and explore some of the most popular methods that traders utilize to make money from falling prices. 

Let me tell you a little secret. Most folks think making money in the stock market means buying low and selling high. That’s for the uninformed and uneducated. There is a ton of money made by doing the opposite.  I’m talking about selling high and buying low.  

See, you don’t have to own something to profit from it. In fact, sometimes it’s smarter to bet against it. That’s where short selling comes in.  

“Imagine you’re at a poker game, and you know the other guy’s gonna lose his shirt. Wouldn’t you bet against him? That’s the idea. With short selling, you’re betting a stock is gonna tank. You’re saying, ‘This company is a sinking ship, and I’m gonna make a killing while it goes down in flames.'” 

Now, why should you care? Well, while most folks are watching their portfolios shrink and bemoaning their fate, savvy traders like you and I can thrive. Short selling is not just a defensive maneuver; it’s an aggressive strategy that allows us to profit from the downfall. 

In a bear market, where prices are tumbling faster than a skydiver without a parachute, short selling becomes particularly relevant. It’s your chance to turn those market lemons into lucrative lemonade. While everyone else is holding their breath hoping their stocks bottom out, you’re there, calmly sipping a cocktail of profits made from their losses. 

The problem I have always had with traditional Wall Street thinking is that it simplifies trading into a binary way of thinking.  Up is good.  Down is bad.  After all, trillions of dollar of people’s retirements are at stake here.  We must not ever talk about risk, poor management, grift, fraud and all the reasons why companies can go out of business. 

My contention is that the price is neither good or bad.  Price is simply communicating value and value is always extremely subjective. There are times when companies are undervalued, and we should consider buying them. Likewise, there are times when companies are overvalued, and we should consider selling them.  Once we recognize that VALUE is supremely subjective, we can escape the negative label that “short sellers” receive when they attempt to make profits from falling prices. 

Let me pull back the curtain on a little Wall Street secret that might just blow your mind. Short selling, that notorious strategy making headlines during market downturns, is often cloaked in an aura of negativity. Why? Because, my friend, when the market bleeds, it doesn’t just leak — it hemorrhages money from traditional investors who are watching their portfolios shrink. And then, adding salt to the wound, short sellers swoop in, borrowing stocks to sell them at a high, only to repurchase them when they hit rock bottom, profiting from the market’s misery. 

But here’s where it gets juicy. This double standard isn’t new; it dates back to the dust and despair of the Great Depression. Post-1929, Wall Street was the bogeyman, the proverbial den of thieves where fortunes evaporated overnight. So, what do you do when an entire industry is down and out, cloaked in negativity and infamy? In the United States, we don’t just fix things; we rebrand them. 

Enter the Public Relations maestros who transformed the tarnished image of “stocks” into the shining armor of the “securities industry.” It’s genius, really. Stocks crash, but securities? They’re secure, safe, almost comforting in their stability. Try this: Google ‘Securities Market Crash.’ Go ahead, I’ll wait. You won’t find much, if anything. That’s the power of a good PR spin. 

And it’s this slick rebranding that’s kept short selling in the shadows, never fully embraced in the standard trader’s education. Wall Street’s moguls have labored tirelessly to shed the casino image, even though, let’s be honest, sometimes that’s exactly what it feels like—a high stakes game where the house too often wins. 

So, the next time you hear someone demonize short selling or romanticize securities, remember: it’s all part of the game — a game where words are carefully chosen to play the tune Wall Street wants you to hear. 

It’s actually quite infantile.  The claim is that the reason your portfolio evaporated was because somebody saw that the stocks you were trading were overvalued long before you did.  They must be bad.  This perspective provides zero understanding to what it is that makes prices move. 

On Wall Street, short selling is a practice that gets quite the eyebrow raise in stock markets but barely a shrug in realms like commodities, crypto, futures, and options. Yes, my friends, in these vibrant financial playgrounds, short selling isn’t just common; it’s almost encouraged!  Short sellers provide liquidity. 

Imagine someone waking up feeling bearish about grains or deciding that oilseeds are about to take a nosedive. They hop onto their trading platform, go short on these commodities, and no one bats an eye. It’s business as usual. This trader could be shouting from the rooftops about their bearish views and… nothing. No uproar, no front-page headlines condemning the negativity — just the market churning on. To each his own, right? 

Now, let me tell you about the curious case of double standards in financial markets. In the stock market, short sellers are often viewed as villains, the doom-bringers who profit from others’ misfortunes. But look over at the traders shorting Bitcoin, gold, or oil futures, and it’s clear: they’re just another player at the table, making calls based on their market read. 

And here’s something that might twist your melon — short sellers are not a monolith. Some are in it for the long haul, patiently waiting for the overvalued to meet reality. Others are like hit-and-run artists, diving into a trade with the agility of a cat burglar, looking to swipe profits within hours or days before slipping away into the night. 

The takeaway? VALUE is supremely subjective. What seems like a reckless gamble to one is a calculated strategy to another, depending entirely on one’s perspective and time horizon. Every dip, spike, or shift in market prices whips up a cocktail of risk and opportunity — it all depends on which side of the bar you’re standing. 

So, the next time you hear someone spouting off about the evils of short selling, remember: in many markets, it’s just another tactic, as common as buying on the hope of a rise. Markets are arenas of differing opinions, and it’s this very clash that keeps the gears turning. 

Let’s take a stroll down Wall Street memory lane to a time called the 1970s. It was a groovy era for the stock market, dominated by the so-called “Nifty Fifty.” These were the titans of the marketplace, the seemingly invincible stocks every investor dreamed of having in their portfolio. Companies that were considered the safest bets, the growth stocks that would supposedly outlive us all. 

Fast forward to today, and what do we find? A drastically different landscape. Most of those Nifty Fifty companies have vanished from their once-celestial perch and no longer exist. Why, you ask? The reasons are as diverse as they are dramatic — obsolescence, mismanagement, outright fraud, and just plain failure to keep up with the changing times. 

And it’s not just a tale of the past. Consider more recent high-flyers like Enron, Toys “R” Us, Borders, WorldCom, Blockbuster, Lehman Brothers — each was a darling of Wall Street, a beacon of supposedly sound investment. Yet, one by one, they fell, not in the hands of short sellers, but because of their own inherent flaws and failures. 

But who gets the blame? Often, it’s the short sellers. These are the market players who are derided and denounced for betting against these failing giants. But here’s the kicker: if it weren’t for short sellers, many investors might still be blissfully unaware of the rot festering within these companies until it was too late. Short sellers often do the dirty work, uncovering the uncomfortable truths that companies want to hide. 

The demise of these companies should be seen not as a market tragedy, but rather as a cleansing fire — removing the weak, the corrupt, and the unsustainable from the market. This is a service to the investor who seeks not just to grow wealth, but to protect it from the hidden dangers lurking in overhyped stocks. 

So next time you hear someone curse short sellers, remember — they’re often the first to spot trouble on the horizon, providing an invaluable service by holding companies accountable. They’re not the villains of Wall Street; in many cases, they’re the unsung heroes, the watchdogs who bark long before the intruders break in. 

You see, the short seller is not just some market marauder looking to profit from misery; they’re more like the vigilant watchdogs of the financial world. 

Picture this: a short seller scans the horizon not just for any stock or commodity but zeroes in like a laser on sectors, industries, or assets that scream “overvalued!” to anyone who’s paying attention. Whether it’s a tech stock pumped beyond its fundamentals, a real estate market bubbling over, or an ETF or cryptocurrency hyped on thin air, the short seller bets against the tide. They’re the ones who dare to say, “Hey, this doesn’t look right,” and put their money where their mouth is, betting that what goes up must come down. 

Now, you might wonder, should we frown upon these contrarian crusaders? Is it so wrong to profit from an impending fall? Consider this: markets don’t just climb to the heavens — they correct, they crash, they come back down to earth. That’s the rhythm of free markets, the very heartbeat of capitalism. Price fluctuations aren’t a bug of our economic system; they’re a feature. 

Short sellers help keep the market honest.  

Think about it. Without them, who’s going to challenge the irrational exuberance that can inflate bubbles to the point of bursting? Who’s going to take a stand when euphoria overrides common sense? By betting against overvalued stocks or sectors, short sellers provide a necessary counterbalance that can mitigate disasters before they reach critical mass. 

So, no, markets don’t only go up. The very essence of a free market is its ability to adjust, to ebb and flow — this is what defines risk and reward. Those peaks and valleys? They aren’t just obstacles in the path of an investor; they are opportunities. Opportunities for the bold, for those who can read the signs, and for those who understand that every high has a potential low lurking around the corner. 

In a world where everyone seems to chase the next big rise, short sellers remind us that what rises can also fall, and that too is a chance to thrive. They’re not just betting against something; they’re part of what keeps the market’s wheels turning, ensuring that overvaluation is called out and corrected, protecting not just themselves, but potentially all market participants from greater losses. 

So, let’s tip our hats to the short sellers. They might just be the most misunderstood heroes (or anti-heroes, if you prefer) in the financial narratives we weave. Keep this in mind as you navigate the tricky waters of investment, and maybe, just maybe, you’ll find that short sellers are not the enemy, but a necessary part of a healthy financial ecosystem. 

Short sellers can and have been used to illicitly manipulate prices but that is a topic for another article. 

Imagine this: You’ve got your eye on a stock, and every indicator screams that its price is about to tumble. Instead of helplessly watching it sink, why not profit from its fall? 

**Here’s how it works: ** Short selling is betting on the decline of a stock price. You borrow shares from your broker that you don’t own and sell them at the current market price.   The broker receives a small fee for locating the shares that you are borrowing, and you are assigned a SHORT (SELL) at the current market price. 

Let me simplify this even further.  Let’s assume that you hear that I am really interested in buying a Lexus SUV automobile.  I have been looking and looking for a model with special features.   

You approach me and tell me that for $40,000 you will deliver that LEXUS SUV to me.  At the time you make the deal with me you do not own the LEXUS.  In Essence you are SHORT the LEXUS.  If you can deliver that LEXUS to me at a price of less that $40,000 you will have made a profit.  If it costs you more than $40,000 you will have made a loss.  If you understand this example and arrangement, you understand short selling. 

By borrowing the stock first, you agree to buy it back in the future at whatever price that might be. 

Later, if things go as planned and the stock price drops, you buy the same number of shares back at a lower price, return them to the broker, and pocket the difference. It’s like magic, turning a potential market downturn into a profit parade!  However, if you are wrong and the stock moves higher you are on the hook for the loss that you created. 

The simplest way that I like to think about it is that everyone on Wall Street wants to buy low and sell high.  With short selling you are trying to make the same profit but are selling first by borrowing the stock and hoping to buy low afterwards. 

Every week on our blog we do a Stock Study to analyze stocks with artificial intelligence that we have been tracking and monitoring.  One of the sections of our weekly stock study is the Best-case/worst-case analysis.  This is the section where we measure the largest uninterrupted rallies and declines of a stock so that we can clearly measure the risk and reward potential of an asset over the last year. 

Here is an example of Tesla ($TSLA) 

These declines were triggered by both profit taking and short sellers.   

Here’s another example from the US Treasury market. In March 2022 the Federal Reserve started to raise interest rates at its fastest pace in history.  There are several REVERSE ETF’s which actively short the Treasury market and increase in value when the price of Treasuries drop in value. The $TBT almost increased 200% in value over a 19-month time frame. 

Let’s spice things up with a bit of the rewards and risks involved. 

**The Rewards: ** 

1. **Profit from Market Declines: ** While others are licking their wounds; you can be the one counting your gains.  All you need to do is borrow the stock first and buy it back later at a lower price. 

2. **Enhanced Portfolio Returns: ** By capitalizing on falling stocks, short selling can significantly boost your overall portfolio performance, even in a bear market. 

3. **Diversification: ** It’s another tool in your arsenal, giving you ways to make money whether stocks are going up or down. 

**The Risks: ** 

1. **Unlimited Losses: ** Yes, you heard that right. One of the primary reasons why short selling is discouraged is because, theoretically, you have infinite loss potential.  Why?  Because a stock can continue to go higher and higher in price, theoretically, the price can go to infinity and beyond. If the stock price goes up instead of down, your potential losses could exceed your initial investment, as there’s no ceiling to how high a stock price can climb. 

2. **Margin Calls: ** Since you’re borrowing to sell short, you must maintain a minimum account balance. If your balance falls below this because the stock price rises, you’ll face a margin call, which means you must add more funds or close the position at a loss. 

3. **Regulatory and Market Risks: ** Short selling comes with its set of rules which can change. Plus, if many traders are shorting, a sudden price increase (a short squeeze) can lead to rapid, substantial losses. 

 Wall Street tends to cast short sellers as the villains, primarily because they’re not too keen on competition. The truth? Markets often plummet faster than they climb, and this rapid descent opens up opportunities to rake in substantial profits by tapping into bear market trends. But let’s be clear — this is no game for the faint-hearted or the fearful. 

If you’re new to this, start with a demo trading account. Get a feel for the risks and mechanics of short selling without risking real money. I got hooked on short selling by analyzing my own trading blunders. It dawned on me that whoever was betting against my moves was laughing all the way to the bank. That was my first real lesson in short selling. 

Remember, tracking short interest is your window into the market’s mood swings — it shows you how many are betting against the stock. It’s a critical tool for every short seller wanting to capture the pulse of pessimism. Think of short interest as a ledger, a clear record displaying the total number of shares that have been sold short but not yet settled. It reveals how many investors are betting on the decline of a stock’s price. 

Why is this important, you ask? Monitoring short interest is akin to possessing a key to the market’s inner thoughts. A high short interest often signals widespread belief that a stock is overvalued, teetering on the brink of a drop. This insight is crucial for identifying potential short squeezes. Such scenarios occur when an unexpected price jump forces short sellers to cover their positions at higher prices, driving the price up even further. 

How can you keep a finger on the pulse of short interest? It’s simpler than you might think. Investors typically track this metric through financial news sites, dedicated market data platforms, or direct reports from stock exchanges, which update this data bi-monthly. Keeping an eye on these changes can provide you with a tactical advantage, illuminating whether negative sentiment toward a stock is increasing or decreasing. 

So, there you have it — short selling is not for the faint-hearted. It requires courage, cunning, and, most importantly, meticulous research and strategy. For those who master it, the rewards can be substantial, but always remember, the risks are just as real. 

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Let’s Be Careful Out There! 

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