To Sell Short or Not to Sell Short Debate Pt. 4

It could happen because other traders are also doing the same thus the stock is thin. Meanwhile, to sell short means to be ready to face the worst case, but the reward is infinite. If the prediction is correct, it means that traders could gain massive return on investment. They could use the margin to initiate this trade.

Margin use could help to leverage, traders do not have to put all their capital for an initial investment. To sell short carefully, allows the traders to have an affordable way to hedge and provide a counterbalance to other portfolio holdings. For investors entering the trading for the first time, it is advisable to avoid short selling. Somehow, doing short selling through ETFs is a safer strategy due to the short squeeze. However, there are also additional risks investors should consider.

The first debate lies in the fact that short selling is using borrowed money. It is a margin trading where you should open a margin account to borrow money from brokerage. You would use your investment as collateral. It would be easier for you to lose due to the minimum maintenance of 25%. If something bad happens like the account slips below there would be a margin call.

In addition, you should be aware that it takes a while for a stock price to decline. In the meantime you could be subject to interest as well as margin calls. There is also a possibility where you could meet a short squeeze. It happens when a stock is rising, then short-sellers cover their traders by buying the short position back. Thus, this buying could turn the other way around.