Shorting can increase profits, even in a long-only portfolio. Discover this simple trick to easily make shorting work.
If an investor goes long in a stock they are buying it believing the stock’s value is going to rise in the future.
When an investor shorts a stock, they are selling a stock they don’t own. Instead the investor is promising to deliver the stock at a future date. The brokerage lends the investor the stock and later the investor “closes” the short by buying back the same number of shares they borrowed.
By borrowing the stock at a higher price and then buying the stock at a lower price, the investor is able to make a profit.
When an investor goes “long” into a stock, they have the potential for unlimited profits from their investment. If they “short” a stock, the theoretical potential exists for unlimited losses. Of course this perceived risk of losses is unrealistic: an investor would close out a position long before they would be willing to incur such significant losses.
So why bother with shorting? Because there are times that stocks decrease in value. The ability to short offers an investor a creative way to take advantage market swings.
Due to recent changes in securities laws, one has to ensure they can borrow a stock before they actually sell it short. Most big brokerages have a large quantity of stocks they offer for shorting. Check with your broker for their most up to date list if you intend to short stocks. Also, brokerages require that you have a margin account in order to short.
So what is a long-only investor to do if they would like to take advantage of the potential shorts have to offer without having to actually participate in shorts? The answer rests in taking advantage of inverse ETFs.
Inverse ETFs are investment vehicles that one can own that profit from short-term bearish swings in the underlying security they track. Inverse ETFs can be bought by an investor without needing to use margin.
And inverse ETFs have 2x and 3x leveraged equivalents just like “normal” ETFs. The Summerland Alerts are set to track potential shorting opportunities and alert for inverse ETF equivalents to the underlying indexes we track.
By utilizing an inverse ETF, the investor can gain all of the advantages of shorting and remain long-only. And by taking advantage of a 2x or 3x leveraged inverse ETF the investor can increase their performance without needing margin.
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Back | Course 7: Knowing the limits of how much to invest in a trade is critical to long-term success and risk management.
