Which is the more risky stock market investment, selling short or traditional long positions?
Which is more risky right now? Which is more risky in a bull market? Which is more risky in a bear market?
In general, selling short is the riskier investment. Selling short means you’re betting that the price of a particular stock will drop by selling shares today that you don’t already possess and having to buy sometime later to account for these shares. Lets assume you short one share of a stock today at $20. Even if the stock drops to zero (theoretically) and you buy back the share immediately, then you made $20 in profit, which is the max you can profit. However, theoretically, the stock could rise to any price, and thus your loss could be really high. So lets say it rises to $200 and you’re forced to buy, then you’ve lost $180!
Buying long positions mean you buy a stock and keep it for long term, hoping the price will rise. Lets say you buy a stock at $20. The MOST you can lose is $20. Whereas the gain theoretically can be infinite.
Because of the above two examples, your potential loss can be much greater with short positions, and thus is more risky. In a bull market, short positions are extremely risky, because a bull market means positive gains for stocks while you’re hoping for drops. In a bear market, it’s the opposite, as long positions are more risky, because a bear market means negative gains for stocks while you’re hoping for rises. However, long term investors don’t really worry too much about dips in the market. They’re banking over many years that a well-run company’s stock price will increase over time, which the market has shown historically over and over again.
Selling short can be profitable, but requires lots of attention, as market timing is more critical, and you must be disciplined in knowing when to cover your positions. Due to the potentially high loss and timing factors, short positions are definitely more risky.
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