It can go wrong, very wrong!Make no mistake SHORTERS often go...

It can go wrong, very wrong!

Make no mistake SHORTERS often go wrong — sometimes very wrong. In our example, imagine if the share price jumped 50 cents! The fund manager would be hugely out of pocket.

For example, in a normal stock investment like you and I would enter, the maximum loss is 100% of our investment — but the upside is unlimited. For our shorter, the maximum upside is 100% – but the downside is unlimited!

Successful shorting requires both timing and a catalyst. Further, the ideal targets for short sellers are companies which operate in a structurally challenged industry (e.g. print media) and have a sub-par service or product.

Shorters must also be mindful of a short ‘squeeze’, which occurs when a number of shorters rush into the market to close out their position, but there is insufficient liquidity in the form of sell orders. When these big, short sellers rush the market a stock’s price jumps higher, and higher, until they acquire the full order. This can ruin their trade.

Regulatory handbrakes

During the Global Financial Crisis of 2008, the Australian Securities and Investment Commission banned short selling because it believed it exacerbated stock price volatility, particularly in financials. To this day, ‘naked’ short selling (selling a stock without owning it) is prohibited.