Making profit when markets fall

00:00:00: Shorting is one of those terms that you hear all the time in the markets.

00:00:04: Investors are short or this stock is heavily shorted, but what does it actually mean?

00:00:09: In this episode we will simply talk about What It Means and how You Can Short an Asset Or Short The Market.

00:00:15: But before We Do And as always Please Keep In Mind That Opinions Are My Own.

00:00:20: This Is Not Financial Advice.

00:00:31: Most people are familiar with the traditional approach to investing.

00:00:34: You buy an asset and you hope its value increases over time.

00:00:38: If it rises, you make a profit.

00:00:40: if it falls you lose money.

00:00:41: And well...you can sell an asset that you own at any time.

00:00:44: That's selling an asset.

00:00:46: Now, shorting is different.

00:00:47: Shorting is one of those concepts that sounds complicated but at its core it is actually quite simple.

00:00:54: It means you are betting the price off an assets that you do not own will go down.

00:00:59: Shortening flips the logic of investing somehow.

00:01:02: instead buying first You take opposite view and position yourself to be a seller And benefit if your price declines while you don't own the asset.

00:01:11: So how does this work?

00:01:16: How do you actually take a short position?

00:01:18: Well, if you watch the film Big Short.

00:01:20: You may think that shorting an asset is quite complicated and in the traditional sense it IS complicated because YOU CANNOT SELL SOMETHING THAT YOU DON'T OWN.

00:01:30: So short sellers must first borrow their assets sell them again to close their trade.

00:01:35: This is short selling and it's overly risky.

00:01:38: It is, in fact one of the riskiest investment strategies in finance giving that when you buy a company its value cannot go lower than zero.

00:01:46: but if you sell a company And If The Company Grows & Its Price Keeps Rising Well There Is No Sealing To How Much Money You Can Lose!

00:01:54: The Good News Is That When We Talk About Shorting An Asset In The Context Of Trading we Are Not Referring to Short Selling.

00:02:00: We are rather referring to shorting a CFD for example, which is contract for differential all features.

00:02:06: And in case of CFTs and futures you're actually not buying or selling the underlying asset itself.

00:02:12: You are simply betting on the price's direction!

00:02:15: A quick reminder, CFTs are derivative instruments that allow traders take long or short positions on assets such as stocks, indices, commodities currencies or cryptocurrencies without owning the underlying assets.

00:02:30: If you trade a stock CFD, You do not own the shares!

00:02:34: if you trade oil through cfts ,you don't own the physical barrels and in the same way...if you trade bitcoins thru CFTS.

00:02:41: YOU DO NOT OWN A BITCOIN.

00:02:44: you're simply trading their price movements And that's why everything becomes more intuitive because there are only two actions that can be taken.

00:02:51: You can buy or sell.

00:02:53: If you think that the price of an asset will rise, then go long.

00:02:56: And if you think it'll fall, then short.

00:02:59: Again, shorting in the context of CFT simply means taking a negative bet on the price direction.

00:03:05: Simply put instead of buy low and sell high are effectively doing reverse.

00:03:10: You're trying to sell high or buy low.

00:03:13: Importantly risk structure here is symmetrical!

00:03:16: If you go longer than the price rises, you earn money.

00:03:22: You'll lose money.

00:03:22: In the same way, when you go long an asset and a price falls while YOU will LOSE MONEY And WHEN you GO SHORT AND THE PRICE FALLS YOU WILL EARN MONEY.

00:03:32: So the mechanics of going long or short don't change The direction your view does ONLY.

00:03:38: Your exposure is defined by your position.

00:03:40: size, leverage & risk can actually be managed in the SAME WAY Whether you're long or short, by using stop-loss orders for example to limit potential losses while keeping in mind that they do not guarantee execution at a specific price especially fast moving and volatile markets.

00:03:59: But infinite, a short position is NOT necessarily riskier than if you carefully manage your risks.

00:04:06: Coming back to shorting Taking negative view on one asset or market Well there are ETFs specifically designed move in the opposite direction of an index or an asset.

00:04:18: So by buying these funds, you can also position yourself on a short side and benefit when losses occur.

00:04:28: Taking a shot in these funds could actually be quite interesting when you think, for example that the market valuations went ahead of themselves and there will also be a downside correction down the road.

00:04:39: In this sense, these ETFs can be useful as tactical tools to hedge portfolio or express short-term market view.

00:04:47: but over long run Be careful because shorting your market is not typically cool investment strategy.

00:04:54: Most asset classes, especially equities tend to rise in value over time driven by economic growth inflation and earnings expansion.

00:05:03: So structurally speaking the odds are often tilted towards upside and staying in a short position too long could be harmful for the long-term investors.

00:05:13: The exception is foreign exchange where you're actually opening one long and one short positions simultaneously.

00:05:20: If you are trading your dollar, for example and expect it to rise.

00:05:23: Well You're buying euros And selling US dollars!

00:05:26: And if you expect it fall, you are effectively selling yours and Buying US Dollars.

00:05:31: That's why the concept of long and short Are much more balanced in foreign exchange markets.

00:05:36: When you're short at Japanese yen For example not just betting against Yen You also buy another currency In exchange such as The US dollar or the euro.

00:05:45: So there is always a natural counterpart To your trade when trade forex.

00:05:50: And this structure makes both long and short positions an integral part of the market, even over longer time horizons.

00:05:58: here are traders and investors don't just look forward valuations to go up or down but they look for relative value between currencies.

00:06:07: in other words effects is less about direction in isolation.

00:06:12: Which economy is stronger?

00:06:14: Which central bank is more hawkish, where are the interest rates higher and how this situation could evolve.

00:06:19: Those relative dynamics create opportunities on both sides long and short in a way that feels much more natural in the FX than other asset classes.

00:06:29: So, In summary... And while shorting your currency is part of every FX trade, taking a short bet in the context of his stock or an index can actually be useful.

00:06:54: In this short run for hedging purposes or expressing a short term view.

00:06:58: but again it should be more tactical than strategic trade.

00:07:02: It should be seen as way to navigate short-term opportunities rather then long-term investment approach Just telling.

00:07:09: So that's all for this educational episode.

00:07:12: I'm Ipek Oskar Deshké and thank you joining me and thank you for all your beautiful and supportive comments.

00:07:18: I hope this Educative Episode has been helpful, it's been insightful to you so please do not hesitate to leave your comments, reactions or questions below as usual!

00:07:31: Follow us on Instagram, on X on LinkedIn but also on Whatsapp, Threads, Telegram & Blue Sky for regular market updates.

00:07:38: Subscribe our YouTube channel for daily market commands.

00:07:42: Don't forget to hit the like button on these videos, so let us know that you enjoy them.

00:07:48: So I will meet again very soon and until then

00:08:06: goodbye!