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What is the danger of short in stocks?

May 14, 2020, 12:15 PM • ☕️ 2 min read

Tags:ShortStrategyExchangeSqueezeSpeculation

Translations: EnglishРусский中文

The operation “short” in the stock market is the reverse of the operation “long” when buying a stock or other financial instrument.

The operation of shorts is characterized by the sale of shares (other financial instruments) that are not in the investor’s portfolio. Thus, the investor becomes a debtor, because he will have as many shares as he will sell them.

The advantage of such an operation is the receipt of money “here and now”, which can be invested in other financial instruments in the “long” position. However, the main purpose of such operations is the faith (or knowledge) of the investor that the market will go down. Suppose an investor wants to sell 10 shares of PJSC Severstal at a market price of 840 rubles per share. Then, during a short operation, he will receive 8400 rubles to a brokerage account (840 * 10).

What are the risks of shorts surgery then?

  1. In any case, it will be necessary to buy shares in order to close the short. It is clear that the investor can hold the short for any length of time, but in any case, for each day of the “short” it will be necessary to pay a commission. The risk is that if the market price becomes - 880 rubles per share, in order to close the short completely, the investor will have to pay 8800 rubles (-400 rubles loss). This will happen in a situation where the market and stock of Severstal continue to grow after the opening of the short.
  2. The cost of the operation of shorts. These costs are set by the broker, and they differ for each broker. For example, Opening Broker has about 13-16% per annum, which is a fairly high value. Tinkoff Broker - depending on the size of the position, but the plus is that if the short is closed for one day, then these costs are not charged.
  3. Short squeeze. Usually professional and advanced investors are familiar with this concept. This situation is when stocks begin to grow sharply upward (for example, by 5.10.15%), which cannot be explained by fundamental factors in the short term. This usually happens when there are a lot of “shorts” in the stocks of a particular company, that is, investors who make a “short” for the stock. Naturally, when the stock price starts to rise, these investors calculate the losses and try to close the short as quickly as possible, this leads to a sharp increase in quotations. In addition, there is such a thing as “margin call” - when the collateral (cash, financial instruments) on the brokerage account of the investor becomes insufficient to close the short. Then the broker automatically closes this short. One example of a Short squeeze is the sharp jumps in the shares of PJSC Surgutneftegas in the summer and fall of 2019.
  4. Limit on short sales (short). All brokers have this limitation, but it can be considered differently - mainly depending on the degree of risk for the stock that opens short. The restriction is also imposed depending on the volume of the portfolio. For example, if the investor’s portfolio is 10 thousand rubles, then selling in short for 50 thousand rubles will most likely fail.

It should also be noted that for a number of shares, short operations may not be available. These include low-liquid shares (for example, PJSC Acron), or ADRs and GDRs (for example, X5 Retail Group, Yandex).