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Short Selling explained.. Short Selling for Beginners (Best Broker for Shorting) - YouTube
Channel: Humbled Trader
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Shorting stocks, the hot and sexy topic everyone
seems to want to learn these days.
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But what exactly does short selling mean?
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With all the low float runners we see going
up 100-200% in June and July, and even all
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the stay at home tech stocks like DOCU, ZM,
and PTON running into earnings recently.
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Lots of people made money buying these stocks
on the way up.
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And that's the conventional way people know
about profiting from the market.
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You buy low sell high.
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But did you know you can profit from the stock
falling in prices?
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That would be very beneficial when the market
is selling off or when TSLA falls from $500
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down to $300 right?
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Short selling is an advanced strategy that
many advanced traders take advantage of.
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It’s a little scary for beginner day traders
at first, but once you understand and master
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the concept ands shorting strategies, you
have your doors open to a whole different
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side of stock market to profit off.
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In this video, I will go over what short selling
is in the simplest terms for beginners, and
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which brokers are the best for shorting.
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Whether you are a beginner trader, or experienced,
or simply here for the bad jokes, there's
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something here for everyone.
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All you have to do is smash the like and subscribe
button, as hard as you can, if you have not
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already.
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Oh, and I won’t be paying for your device
screen if it accidentally cracks.
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Sorry I’ll supply the bad jokes, but not
the phones.
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Short selling stocks is a much riskier way
of making money in day trading, when compared
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to going long.
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And it is not entirely that straightforward.
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Well, nothing in trading ever is anyway.
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To understand what short selling means, let's
take a step back and talk about going long.
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Which is the conventional way everyone knows
how to profit from the market.
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Going long means buying shares of a stock
with the expectation that the company's shares
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will increase in value.
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Let’s say you bought 100 shares of a stock
at $8.
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When you sell the the stock at $10, you make
a$2/ s profit.
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On 100 shares tahts $200.
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Simple enough right?
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Short trade is like the reverse of long trade.
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To profit from shorting, you make money when
the stock prices drop.
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That’s like you are betting on the death
of a company.
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So you kind of have to be alittle bit jaded,
cynical, and need to have an eye for … bs
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in the stock market basically.
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Here is how short selling works.
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Before I could even execute an order to short
a stock, I need to borrow stocks from a broker.
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And If i have access to those shares from
my broker.
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Then, to open the short position, I have to
sell short those shares at market value to
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someone else, some unfortunate souls, buying
those shares.
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And when the stock drops later on according
to my trading plan...
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I can close the position by buying to cover.
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Basically I’ll those shares back at a lower
price.
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Remember, I borrowed shares to sell from my
brokers in the first place.
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If the stocks I short sell, short selled short
sold, was at $10, and when I buy the stock
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back the stock is at $8… that means I profit
from the difference of $2 a share a share.
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If I shorted 100 shares.
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Then that means I make $200 dollars.
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See, its basically the reverse of buying stocks.
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You can see now that short selling isn’t
your typical trading measure, where upon buying
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a stock you hope for the continual success
of a company and increase in share value.
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When you short, you are essentially saying
this company is a piece of sh*t and should
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tank back down to earth.
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Well i mean, they dont all have to be turds.
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Sometimes the stock prices just escalate too
much too quick.
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Even if they are real companies like TSLA,
AAPL or Zoom. we’re day trading the intraday
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volatility afterall.
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And for each breakout higher, its healthy
and normal to see a pullback and drop in share
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prices.
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Short selling stocks Looks easy right?
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Wrong
While everyone out there seems to be thinking
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that short selling is easy.
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I need to make some very key downsides involved
with short selling very clear here.
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First of all, lets go over the RISK of short
selling.
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If my trading thesis on the short side at
$10 is wrong, and the stocks instead run to
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$12 per share… then that means I lose $2
a share.
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And when you’re shorting..
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You could actually lose a lot more.
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This is exactly what happened to one Trader
Joe back in November 2015 who placed a $18K
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short position on KaloBios Pharmaceuticals…
ticker symbol KBIO.
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Does that crazy stock ring a bell for anyone,
I know it did ring a few margin calls.
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KBIO was a struggling pharmaceuticals company
running out of cash.
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And they announced news that were eventually
have to shut down pipelines for their drug
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development.
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Seeing that news, Trader Joe thought the stock
could fade even lower and break $2.
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On that day the stock closed at around $2.07
a share.
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So our trader joe was short around 9K shares
overnight.
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But guess what, news came out afterhours that
day that Marin Shkreli bought 50% of its stock
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and he was continue help them continue their
drug operations.
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This is explosive news for a drug company
nearing bankruptcy.
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Do you know what happened?
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When news came out after hours.
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The stock spiked over800% to $1i.
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And KBIO is not just any stock.
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Its a low float stock.
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This trader Joe essentially got short squeezed.
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And this is a very real scenario that could
happen when you are shorting stocks, especially
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these trash, low float, small cap companies.
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Gains and losses work side by side.
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Investors, traders, and risks are like partners
in crime.
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Or you could say the perfect couple.
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Where you find one you get the other.
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Shorting is not as easy as it seems.
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Like uncle Ben said in spiderman With great
buying power, comes with even greater responsibility…
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of risk management.
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This is something that's very important to
understand, when you go long and buy the stock,
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you risk is limited.
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The most you could lose on a $1000 investment
from buying a stock is $1000 right?
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Because the most a stock could drop to is
$0, not negative.
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But when you are short selling, your risk
unlimited losses potential.
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But if you short a stock, at $2, technically
this $2 stock could go to 10, 50, 100, or
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the moon or even higher.
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And thats why the potential losses when you
short, is Unlimited.
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Think Joe Campbell and you will get the idea.
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When he shorted the stock at $2, and the stock
squeezed to $19.
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He had been squeezed for $17 per share.
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And remember he had 9K shares.
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So lets do the math here.
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-$17 times 9000… equals… a half a lamborhghini.
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Trader Joe basically got short squeezed..
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A short squeeze, like we mentioned earlier,
is when the short sellers holding the stock
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short, are forced to buy to cover at a major
loss, because the stock they had predicted
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to fall in price, actually runs and breakout
to the upside.
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Sometimes the stock could break out for 50
cents, a few dollars, or like in the case
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of this low float stock like KBIO… ran up
for over 900%, from $2 to $19.
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Remember, if you, or I, or Trader Joe sees
a short set up on this bankruptcy stock, we’re
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probably not the only one.
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And when a stock squeezes like that, other
short sellers buying to cover their short
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positions for losses also adds fuel to the
buying pressure on the stock.
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And that in term forces the stocks prices
going higher.
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And this is why, risk management is especially
important when you are shorting.
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Remember, the risk is unlimited.
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Second key downside of short selling.
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Is the cost.
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Just like all these low float runners that
everyone wants to short, With the rising interest
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in shorting, locate fees have gone through
the roof to the moon.
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Not all stocks are free to borrow to short.
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Yes there are stocks like ROKU, AAPL ect that
are called, easy to borrow, usually free of
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cost.
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But for these small cap runners like we mentioned
earlier, then could be hard to borrow.
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And brokers will charge you a premium to locate
those stocks short.
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Like you, the broker is also looking to profit.
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Locate fees on these hard to borrow stocks
are quoted on a per share basis, with a minimum
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of 100 share lots.
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So if it cost $0.04 per share to locate a
stock short, on 100 shares that cost is $4,
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on 1K the cost would be 40.
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Keep in mind you have to pay these fees regardless
of whether you lose or profit from your short
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positions.
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So imagine losing $3K shorting these low float
stocks, and still have to pay an additional
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$500 locate fee.
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Yeah… not fun.
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Short selling could be extremely costly, and
thats why you need to learn how to properly
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short, and you want to have a decent account
size to do so.
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Locate fees could cost 10 to 25% of a traders
monthly profit.
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So lets talk about the most commonly asked
question in my comments… which broker did
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you find those locates to short.
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My preferred broker to short sell is Cobra
Trading.
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They have access to the hard to borrow stocks
at a very reasonable price.
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And sometimes even for free.
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While the same kind of stocks at other brokers
could cost 2x or sometimes even 5x teh locate
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stocks.
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It’s also worth noting that Corba trading
has a much more flexible system when calculation
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swing short fees.
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And its usually much cheaper than other premium
brokers.
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Who will charge you x3 or even x6 the locate
fee when you short overnight.
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To open an account at these premium brokers
for shorting, you must have an account of
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at least $30K minimum above PDT.
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Cobra trading is available for US traders,
as well as many other international clients.
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But the moment, they do not accept Canadians,
sorry about that guys.
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If you’re interested in signing up with
Cobra Trading and get access to these hard
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to borrow stocks like I do, you’ll get an
additional 25% off commissions if you use
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my referral link down below.
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25% off.
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Thats a very good deal.
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For traders with a smaller account under PDT
rule, and Canadian traders, looking for a
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broker to short these hard to borrow stocks.
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TradeZero is my recommendation.
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But their fees are usually alot higher.
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Locate fees are just the cost of doing business.
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Regular discount brokers like E-Trade, Interactive
brokers, Robinhood, Thinkorswim wouldn't have
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any Hard-to-Borrow stocks to short.
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Short selling can definitely be a very High-profit
potential.
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I am not saying it is guaranteed.
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From everything we have learned today, it
most definitely isn’t.
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And there's definitely lots of costs, and
risks associated with short selling.
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