<OT> Jill, there are several books out there about trading (and daytrading). Personally I can't endorse any, as I haven't read them.
Very briefly:
1)Shorting is generally riskier than going long for several reasons:
a)The Upside is mathematically limited to the value of the security (ie, at most it can go to 0), while the downside is unlimited (security can keep rising like MSFT). Exact opposite of going long.
b)A secular bull market has a natural upward bias over time, and so, it is hard to be a "long term short and holder". Of course if you are sure a stock is going to 0, you can "keep the short". That's relatively rare.
c)From (b), it follows that shorting is more of a trading activity than an investment activity, and therefore a more "high maintanence" activity.
d)At any time, the broker can "buy you in", thus defeating your short. This can happen several ways. One way is when you short, the stock stages a brief rally up before declining. Well, you don't cover, thinking "this will pass". And you may be right - it will pass, and the stock will head down. Except, because you sold "borrowed shares" (shorted), the broker has the right to give those shares back to the original owner when the original owner suddenly needs them (to sell himself, or requests a certificate etc.). This is a deadly feature of shorts. What can happen, is that during that brief spike up, the broker "buys you in" at the urgent request of the original owner - and buys you in at whatever the price is at that moment on the open market, often the high of the day. So now you find yourself in the absurd position of having your short taken away from you higher than what you sold it for, and then an hour later the stock crashes, and you are furious: you shorted at say, $20, the stock spiked to $25 for 1 hour, and then crashed to $7 three hours later - except you got forcibly "bought in" at $25, and so instead of making $13 points ($20 minus $7), you lost $5 ($25 minus $20) - and guess what, you were right all along, the stock crashed, except it made a last gasp up before doing so. However, it gets worse. Imagine that you actually called the very top on a stock, you shorted it, and it declined with *no break* - keeps falling. In our example, say you shorted it from $25. Now you expect to make $18 profit on a decline to $7. Except you make $2. Why? The broker "bought you in" at $23, because the original owner wanted to sell himself, and suddenly, you need to give up your shares. So, this again is the opposite of going long - if you are long, you need not fear that the broker will sell you out on a temporary decline (unless you are on margin, you get hit with a margin call, and you can't meet it!) - you can withstand *temporary* adversity - the short does not always have the luxury of withstanding a *temporary* adversity; so too with going long - your long gains cannot be cut suddenly, the way a short gain can be. Thus it is riskier to short. Further, many of these buy-ins can happen at an outrageous level because of the well known "short squeeze" phenomenon. Obviously, some of these buy-in risks are greater with a thinly traded or illiquid, or small float issue, and are greater with extremely volatile issues (like many nets).
2)Many juicy targets for shorts, are not shortable - your broker cannot find the shares to borrow, or the issue is simply not shortable.
3)It is harder to execute short orders, because of the various upbid (Nazdaq) and uptick (NYSE) rules. Briefly: your short sell must be executed at at least a teeny (1/16) above the last best bid (tick). These rules often leave you immediately with an initial paper loss - it is hard to "hit" the short at an exact peak on the ask. Further, because of these rules, however nice a short sounds in theory, sometimes you will find it harder to execute in a rapidly declining security. I've faced situations where a stock declines rapidly from the open - and despite my placing short sell order after order on the ask, I don't get executed as the selling is taking place all on the bid side. The result is that by the time you get executed, the stock has reached a bottom, and is now reversing. There are techniques for dealing with this (one used to be called "shorting against the box" but since the rules revision you now have to resort to a combo of trading the stock and "boxing" it w/ an option).
4)Some brokers charge you interest for the short money, and there can be complications with dividend yielding issues.
Obviously, shorting can be very profitable, and every trader should know how to short or else they won't make money in a declining market (frankly I don't regard non-shorting traders as true traders, because they are unable to make money in ALL markets). However, there is no doubt that shorting is harder to do than going long.
The above is just a small sketch of some of the issues involved with shorting, but any book on trading should be able to deal with the topic. Unfortunately, I cannot recommend any.
Morgan |
