The 3 main risks of short selling - #3 may surprise you!

Hi, welcome to this new video. Today the topic is very important and it's potentially one of those videos that can really help you save money. Or I would say help you not lose money. Because today we are speaking about short selling. Now, before we proceed, if you have not yet subscribed to this channel, do it now and also hit the bell. So you will be notified when I upload new videos. And now let's move to the content. Why would I like to speak about short selling is because it's something I believe people don't really understand completely. And when you don't understand completely, it means there is a risk to lose a lot of money. Okay, now what is short selling? First, I don't know if you are aware, but short selling is this operation that allow you to borrow shares of stock, etf, whatever it is, and you can sell them. So if the price goes down, you will buy back later at a cheaper price and give it back to the broker. So you make money basically when the price goes down. And it's good to know that you can do short selling because it means that even if the market is bearish and is going down, you can still make money. However, there are some risks when you do short selling. And today I want to touch three of them and I believe that probably you are aware of the first, maybe the second. But the third one is something very important and is often overlooked. So just stay with me till the end of the video and you will see all these three risks. And then you will also understand why short selling is not so safe in a way because there are more risks than buying long. So when you buy long, it means you just buy shares of a company and then you make money when the price goes up, Right? But what is the worst case scenario? Well, the worst case scenario is when the price goes to zero, technically, right? So you lose your all capital that you put in the stock. Problem is when you do short selling, you lose money when the price goes up and there is no upper limit, the price can go as up as possible. So it means that you may even lose more money than what you have in your account. That's right. And this is scary because it means if you have your account with say $30,000, you may wake up one day and see that you have minus $200,000 and you have to pay to the broker. And it happened. There are stories like that. So why is that? So let's have a look at this company as example. And let's say that you short sell around here, right? So you short here and then you put your stop loss here. Okay? So you make money when the price goes down. Now what happened in this case? The price open here, okay. And you can see that it open at 8:86. So what does it mean? You were supposed to risk this. This is how much you will lose. But actually how much did you lose? This. Right. Because this is the price at which your stop loss was triggered. Remember, stop loss is an order that is not triggered at the stop level. Right. Whenever the price in this case is above the stop loss, it will become a market order. So if you're not familiar with stop loss, I made a video about that. Please have a look. So roughly speaking here, I think we can say that you will lose four times more than what you have set here as risk, right? Why? Because you have the short selling. Now the difference with long, as I said, is that at least when you go long, the minimum we can go is zero. But what if instead of nine it opens at $30? Well, is it unlikely? Yes. Is it impossible? No. Especially when you have companies that are biotech Corp. Company, Pharma company, right. And company that are kind of penny stocks saw trading at below $5. Right. So here, this one for example was trading at below 5 and basically is not something that you want to short sell. Okay, so remember, the first risk here is basically the gap. So that's why I suggest you a few things. Number one, don't short sell. Okay, let's write here. So I will say no short sell. What? Pharma company. Why not? Because pharma companies, sometimes they have a very good news, maybe they have a good result for a drug they are testing and then you can have this crazy gap up. No short selling, near earnings. Why? Because also earnings potentially are associated with huge gaps. So it's better if you have a position, short position open, close it before earnings. And I would also say no short selling penny stock. That means less than or equal to 5 US dollar as indication in the US market. Why? Because they may be easily manipulated. So they can be, the price can be pushed up. And also don't short sell stock with low volume. Okay, so in this case, well, there was a huge volume here, but the average volume is 26k is not really big. So I would say at least 100k average volume or even better if it's 200 or more. But definitely 26 is not much. Now what is the next risk? Well, the first risk as we have seen is the gap up. And probably were already aware of that now the second one that I want to touch and I want to show you this from my account management is a risk that is related to this fees that you have to pay to the broker when you borrow shares. So this is a statement from my account where you see the short position that I had. And then you realize here that every day you have a short position, you need to pay something to the broker, right? So every day you will have money to pay. And then these will sum up. Now, in my case, it was not much, $47. But imagine you have a position that you keep open for long time and maybe is even a big position. These fees that will accumulate and you have to pay to the broker may have an impact eventually on your profitability. Because maybe you keep your position for a few months and then you realize that, well, I made a few hundred bucks, but I have to pay to the broker, 100, right. So it's not really good. You need to be aware of this number. And usually this is interactive broker. But I guess any broker, you can find out how much you have to pay when you short sell. Look at the fee rate every day and you will also realize that this rate can change every day. So it's not fixed, can go up, it can go down, but more or less, you can have an estimation and you will see, for example, in this case, I was paying 50 cent every day. It may not be much, but it depends on your position, right? So if I have a position where I'm supposed to make like I'm risking $50 to make 100 and I have to pay 50 cent every day. Well, if I start to keep the position open for a few months, then it can be an issue. So second one, remember, check this interest that you have to pay to the broker to have your short position open. And now the third one, that as I said before, is something that many people may not be aware, but it can be really dangerous. And it's about dividends. So let me show you an example. This is a position that I have open currently, you can see here, right, Is still open, is an ETF remx. And I'm shorting this guy. And I want to show you, and I want you to focus on this number. Dividends is a very high number, 13, 72% of dividends. Now, what is the problem here? The problem is the following. When you buy something, you are basically getting the money that is paid as dividends, right? So I buy shares and then I get the dividends. That's more or less what we do with the REITs. If you watch some of my other videos, you know that I usually buy REITs because I'm interested in getting dividends. However, when you short sell, you have to remember then what? When it's time to get dividends, the guy that is short selling should actually pay the dividends. Why is that so? Because when you short sell, someone is giving you the shares and then you have to give the shares back. So when the dividend is paid, you are the one that basically needs to pay that guy, right? So what happened is this Here, I want to show you something here. When you check this thing like the dividends, it's better to go on Google and see what happens. So here you see that they pay dividends once every year. Okay. And the next payment will be according to this is always around December. 12 December. Well is 18, 19, 20, 21, 22, but usually it's around December. Right? So what is the problem here? This ETF pays dividend in December. And if you look at the number like last time it was pretty high. Now imagine they are paying this dividend the same number next December. So they are paying $1 68, 69 and the stock is trading at 12, so is around 13 more than 13% dividends. So what is the impact if you are short selling? Well, the impact is the following. What happens is that you are getting the dividends, right? You have to pay, sorry, the dividends. You. So you will have a loss of 13% just because of that. Meaning to say, let's say that with your short selling you are making a 6%. Then just because of the dividends you will go negative. So you have to make sure that you know if the company or the ETF is paying dividends when you are short selling and especially if the number is big. My suggestion is close the position before they pay dividends. Because otherwise even a profitable position can become non profitable. Okay, so this is something that you should remember. And just to conclude, I want to summarize the three risks. Maybe we can write them here. Number one is the risk of gap up. Okay? Because when you have gap up, basically you have a limited risk. So remember, close the position before earnings. Don't short sell things that are associated with high volatility. Like pharma company penny stocks, low volume. Number two, you need to check the fees that you are paying to the broker to keep your short position open. If you see that compared to the amount of money you can make, these fees are very high, you may close the position earlier. And number three, dividends. So again, remember, when you are short selling, you are the one paying the dividends. If the dividends, like the yield in this case is very high, you may want to close the position before the dividends are paid. So with that I would like you to again subscribe. If you have not yet done it, if something is not clear, write a comment. I will be happy to answer to your questions and as usual, see you next time.