One of the biggest contributors to losses for traders in the financial market is the temptation to sell short. Borrowing shares of a company that are not owned by the seller in the hopes of making a massive profit has shipwrecked more traders than probably any other factor. With stories abounding of the quick and easy profits to be made in selling stocks which are supposedly on the verge of plummeting, it’s no wonder that the allure of “shorting” is so irresistible to so many.
Selling short is a simple enough proposition: place a short sale order with your broker for a company whose shares you believe are overvalued or technically “overbought”. Then just sit back and wait for the profits to start rolling in. If only it were that easy! The trouble with selling short is that in most cases the odds are against the short seller. This is due to a number of factors, some of which we’ll examine here.
Perhaps the biggest risk for short sellers is the crowded short trade. A high-profile example of what happens when too many traders pile into a single stock on the short side occurred recently – a cautionary tale if ever there was one. It involved the loss of one man’s entire fortune due to a misguided attempt at selling short one of the most widely traded U.S.-listed stocks. It’s a textbook case of what can go wrong when attempting one of the most dangerous of all trading maneuvers.
According to MarketWatch, Canadian investor F.S. Comeau bet his last $249,000 against Apple Inc. (AAPL) in an attempt to reclaim $2.5 million lost in poor investments. At the time of the trade, shares were valued around $122, and MarketWatch reported that an increase of just $6 would deplete Comeau’s savings.
Apple shares screamed higher last week when the tech giant released an impressive Q1 earnings report and Comeau lost substantially. As of this writing, AAPL shares had risen to a 52-week high of $130.50.
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