What is a short trade?

What is a short trade? Short Selling

Short selling, also known as Short Selling in English, is an investment strategy that is opposite to the conventional stock investment strategy. Under normal circumstances, the vast majority of investors will make profits through rising stock prices, so they will first buy low and then sell high.

Short selling is to gain profits from the decline in stock prices by first selling high and then buying low. You can easily conduct short transactions in the stock trading software Futu moomoo. Just click the [Short] button of the individual stock to complete.

[Futu moomoo provides the activity of opening an account and depositing money to draw US stocks, please check: Futu moomoo introduction] Short selling is often used to hedge investment risks in order to maintain profits when stock prices fall.

There are also investors who use hedging to make speculative investments, and may use unethical means to suppress stock prices in order to obtain high profits. Because stock prices tend to fall faster than they rise, some speculators can make high profits from short selling if their judgment is correct.

However, the risk involved in short selling is much higher than that in long trading, because the minimum value for the stock price to fall is limited, but there is no upper limit to the rising price, so short selling requires investors' trading experience and investment vision to be very high.

The most famous successful short-selling trader is Michael Burry, a value investor who predicted the 2008 economic crisis.

The basic concept of short selling is: investors borrow stocks from brokers when the stock price is high, sell these stocks at the same time, wait until the stock price drops, then buy back the same number of stocks, and return the stocks to the broker at the same time to earn the difference in stock price.

The operation of buying back stocks from the market is called "Buy to Cover" in English. For example, an investor borrows 10 shares of stock A with a price of $100 from a broker and sells them to the market at a price of $100. When the price of stock A drops to $50, he buys back 10 shares of stock A from the market and returns the shares to the bonds.

At this time, the investor earns a profit of $50 per share, totaling $500. Corresponding to short selling is long trading, which is the most conventional type of stock investment transaction.

Investors buy stocks to establish a long position when they think the price is low, then wait for the stock price to rise, and sell when it rises to the ideal price, earning profits from the difference in stock price.

In actual practice, investors need to perform the following operations: Apply to open a margin account (Margin Account), open a short position (Short Position), and intervene in stocks from institutions. At the same time, maintenance margin (Maintenance Margin) is deposited.

The maintenance margin amount ratio is set by the Financial Industry Regulatory Authority (FINRA), the New York Stock Exchange (NYSE) and the Federal Reserve, and is usually at least 50% of the value of the short position.

During the transaction process, investors must keep the balance in their account higher than the maintenance margin amount at all times, otherwise the position will be forcibly closed. During the stock intervention period, investors need to pay interest to the lender on the borrowed stocks.

When the stock price falls to a desired price, investors can buy the stock and return it to the lender, earning a profit after deducting all interest, commissions, and other fees. How to use Futu Moomoo for short selling? Futu Moomoo is one of the most mature financial trading software on the market.

For stock short selling, Futu Moomoo not only provides a detailed trading introduction to help novices quickly understand the principles and operation methods of short selling, but also provides learners with short trading knowledge testing and practice sessions.

Futu Moomoo investors can obtain points provided by Futu Moomoo after completing the study of relevant content and passing testing and practice. Currently, you can get 300 points by completing the test and 888 points by completing the practice. If you are already a Futu moomoo user, please log in to start testing and practice.

If you are not a Futu moomoo user yet, you can consider opening an account and making a deposit to get multiple US stocks for free.

After entering the formal transaction, Futu Moomoo also provides real-time market indicators for short trading, including Daily Short Volume (Daily Short Volume) and Short Interest (Short Interest), etc., providing traders with more market information for short trading and accurately judging investment opportunities.

The process of short trading through Futu Moomoo is shown in the video below: The specific steps are as follows: Step 1: Select the target stock. Not all stocks support short selling. Only stocks with an orange "Short Margin" icon on the information page support short selling transactions. The chart below uses NetFlix (NFLX) as an example.

Step 2: Click "Short Margin" to obtain detailed short selling information of the stock.

Step 3: After confirming the trading intention, return to the trading page and click "Trade" under the stock to enter the trading page; Step 4: Enter the number of stocks to be traded in the data column and click the "Sell" option below; Step 5: After reading the transaction reminder, click "Continue Anyway" to complete the establishment of the short position; Step 6: After completing the short-selling transaction, you need to check the risk level of the account from time to time.

If the account level is "high risk", your account may be liquidated. Step 7: Track the stock. After the stock price falls and reaches the target price, click the "Trade" option on the stock page, enter the number of stocks to be bought, click "Buy", and then "Continue Anyway" to complete the "Buy to Cover" order.

When the entire number of "sell" shares is purchased, the short position is closed and the short transaction is completed. Three important indicators to pay attention to when selling short It should be noted that it is impossible to judge the changes in stock prices by just using one or a few indicators.

Please summarize it during the learning process and find out your own judgment method. When conducting short trading, you need to pay attention to three important short selling indicators: Daily Short Volume: refers to the daily short trading volume of public transactions. For U.S.

stocks, this data is provided by the New York Stock Exchange; Net Short Interest (Short Interest or Short Float): Refers to the total number of stocks shorted. Also often expressed as a percentage (%), the number of shares currently short is calculated by dividing the number of shares that are currently short by the total number of shares outstanding.

Short Ratio: The ratio of the net short amount to the daily short trading volume, that is, the ratio of the above two indicators, indicating the average number of days that short stocks are Buy-to-Cover, so it is also called Days to Cover Short in English. The calculation formula is, Short Ratio = Short Interest / Daily Short Volume.

In general, the higher the values of these three indicators, the stronger the short-selling sentiment. These indicators can be observed in Futu moomoo. Simply click on the stocks you are following, and then find [Analysis] from the top option to find the important indicators of Daily Short Volume and Short Interest.

Screenshot Among them, Daily Short Volume and Short Interest are displayed in the upper and lower parts respectively. For the Daily Short Volume located on the upper side, you can long press each Column on the bar chart to obtain data such as "Total Short Volume", "Trading Volume", and "Short Sale Ratio".

Total Short Volume: refers to the total short volume on the day, that is, Daily Short Volume; Trading Volume: refers to the total trading volume on the day;

Short Sale Ratio: Note that this is different from the "Short Ratio" introduced before. It refers to the ratio of Total Short Volume to Trading Volume, which is the ratio of short selling to all trading volume on the day.

For the Short Interest located on the lower side, you can obtain data such as "Short Interest (%)", "Short Interest (Volume)", "Days to Cover" and other data by long pressing: Short Interest (Volume): It is the total amount of short selling calculated according to "volume" Short Interest (%): The total amount of short selling calculated as a "percentage",

that is, the ratio of the total amount of short selling to the total number of stocks issued; Days to Cover: This is the third short-selling indicator "Short Ratio", which indicates the average number of days it takes for investors to buy back the stock after shorting it. How to use the above three indicators to judge the trend of stocks?

Here, we use “Total Short Volume”, “Short Sale Ratio” and “Short Interest” used in Futu moomoo APP to explain. If Total Short Volume only rises, it cannot determine the stock price trend. If the Total Short Volume rises and the Short Sale Ratio continues to rise, then the stock price may fall in the short term.

For example, from January 8 to January 24, 2022, Tesla's (TSLA) Daily Short Volume and Short Ratio were both improving. Therefore, during this period, TSLA's stock price showed a downward trend. If Short Interest shows a clear upward trend, it means that most investors are pessimistic about the stock and the stock price may fall.

But if there is a sharp decline in Short Interest, you must be careful. It may be that a large number of short-selling investors are buying back the shorted stocks, and the stock price may rise. Michael Burry – The King of Shorts? Michael Burry is arguably the most successful short-selling profiteer.

Michael Burry has mild autism, but this condition helps him gain unusual concentration when learning and researching some content. When he discovered that he had a great interest in financial investment while studying medicine, he dropped out of school and began to study financial investment, and established Scion Capital Fund Company in 2000.

After establishing Scion Capital, he analyzed market trends through his unique financial perspective, achieved a 55% return in the first year of operation, and managed assets of up to US$600 million in 2004. In 2005, Michael Burry predicted an impending crisis in the real estate industry and told his investors to short the market together.

Eventually, the subprime mortgage crisis broke out in 2007 and the financial crisis broke out in 2008. Many banks and hedge funds collapsed due to these crises, but Michael Burry led his investors to earn billions of dollars in profits. Later, Michael Burry closed Scion Capital in 2008.

During the eight-year period, Scion Capital's total return was as high as 489.3%. Michael Burry became famous by profiting from short selling during the 2008 financial crisis. His experience was written into the New York best-selling book "The Big Short".

At the same time, his experience during the 2008 subprime mortgage crisis was also remade into the Hollywood movie "The Last Short". The Chinese translation is "The Big Short" and is well known to the world. Why do investors short stocks?

Shorting trades are typically entered into for two purposes: hedging or speculation. 1. Risk hedging This is the most common purpose of short-selling trading. Investors buy stocks to establish a long position, hoping to earn profits through the increase in stock prices while establishing a short position.

In this way, if the stock price rises, investors can obtain income from the long position. If the stock price falls, investors can still obtain a certain amount of income from the short position to hedge the risks caused by price fluctuations. 2.

Speculation Because stock prices often fall faster than they rise, some investors choose to speculate by shorting the stock. When they predict that the stock price of a stock will fall sharply in the near future, they borrow a large amount of stocks at a certain price and sell them.

When the stock price drops rapidly, they buy a large amount of stocks and return them to the lender, thereby earning high profits quickly. What are the advantages of short selling? 1. Hedging investment risks The biggest advantage of short-selling is that it can hedging risks.

When investors invest in a stock or a group of stocks, they may face investment risks caused by falling stock prices. If they conduct short-selling transactions at the same time, they can hedge against the risk of falling stock prices. Regardless of whether the stock price rises or falls, they can guarantee gains from their investment. 2.

Low initial cost The initial cost of a short-selling transaction is almost only the margin. After paying the margin, you can borrow the required stocks and then start the short-selling transaction. 3. Make leveraged investments Short-selling transactions can achieve the benefit effect of leveraged trading.

The initial cost for investors is the margin amount, and the margin is a certain proportion of the value of the borrowed stock, such as 50%. The maximum benefit ratio of short-selling transactions can be close to 100%, that is, the stock price drops to nearly $0.

For example, when an investor borrows stocks worth $10,000 and the margin ratio is 50%, the investor needs to pay $5,000. When the stock finally drops by nearly $0, the investor will gain $10,000 by buying back the stock and returning it to the lender, minus the initial cost of $5,000, which is a gain of $5,000. What are the disadvantages of short selling?

1. No upper limit on losses Short selling is different from long trading. The maximum loss for long trading is your net investment. For example, if you invest US$10,000 and go long on Apple stock, if Apple's stock is completely delisted, you will lose up to US$10,000. And there may be no limit to losses on short sales.

The losses from short-selling transactions come from the increase in the stock price of the target stock, because short-selling transactions make profits through the decline in stock prices. If the stock price rises, investors have to buy back the stocks at a high price and return them to the lender.

In this case, the stock price difference becomes the main loss for investors. Since there is no limit to the rise in stock prices, there is also no limit to the losses faced by investors.

At the same time, during the investment process, investors must ensure that there is sufficient margin in the account at all times, otherwise they will be forcibly liquidated and suffer losses. In addition to the stock price and margin, short-selling investors also face interest payments for borrowing stocks.

As the trading time prolongs, the amount of interest ultimately required to be paid will continue to accumulate. So overall, short investors face a much higher risk of loss than long investors. 2. Forced liquidation of positions Since short selling involves borrowing stocks, you need to pay a certain margin.

However, if the stock does not fall but rises, then you need to make a margin call. If you fail to make a margin call in time, your stock will be liquidated, which is called a "Margin Call" in English.

Especially when a stock with a very high proportion of short positions rises sharply, a large number of short positions will be liquidated, causing the stock price to rise further and causing more liquidations. 3.

Facing a short squeeze (Short Squeeze) When a stock is heavily shorted and the stock price rises rapidly as short sellers begin to buy back the stock, a short squeeze may occur, in which short investors reduce their gains or even suffer losses due to the concentrated trading of other short investors.

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