Everything You Need To Know About Shorting Stocks

Shorting stocks can be very lucrative. But you need to know the ins and outs before you attempt this advanced trading/investing technique. Watch the video below to learn how!

We go over:

  • Why you should short
  • The differences between shorts and longs
  • Trade management techniques for shorts

You can access a PDF version of the presentation here. 

You can also find a short write-up on the topics expressed in the video below.

The pain of losing money far outweighs the joy of winning. If you don’t me believe me, imagine buying a penny stock that ran up 1000% in a few years. The $100,000 you invested is now worth $1,000,000. You finally cracked that 7-figure level worthy of major bragging rights. But the very next day, the stock craters on fraud allegations and your account is back to $100,000. How would you feel? Terrible? Most people would feel much worse than if they had never bought the stock in the first place. This is called risk aversion. We suffer from it all the time as investors. But you can avoid this suffering if you learn to profit from the upside AND the downside.

Before I learned to short sell, the only thing that helped me deal with a down market was a stiff pour of Jack Daniels. But once I learned how to profit when blood covered the streets, things changed. I no longer feared the bear. I actually looked forward to it. Learning to short sell stocks relieved the most anxiety out of anything I’ve ever learned as a finance professional.

If you too want to conquer the stress of bear markets, here are the top 10 things you need to know about shorting stocks:

1) Over 40% of stocks in the Russell 3000 have had a PERMANENT 70% decline since 1980.

Yep, that’s not a misprint. J.P. Morgan published eye-opening statistics on just how bad some stocks can perform. We never hear about the losers because of survivorship bias. People like talking about success stories and forgetting about failures.

2) Shorting stocks is playing against the rest of the world.

When you’re short selling stocks you have to understand that the system is designed to promote and support bull markets and rising prices. Banks, governments, institutions, financial advisors, you name it. They all support higher prices because that’s how they make their money and keep the citizenry happy. Be prepared for severe backlash as a bear.

3) You can’t outright short stocks in a retirement account (but there are ways around it).

Regulators have banned short selling in retirement accounts. But that doesn’t mean you can’t profit in a bear market. Inverse ETFs allow investors to buy funds that appreciate in price when the broad market takes a dip. Additionally, retirees can buy put options to bet on downside in specific stocks.

4) You have to pay a “borrow fee.”

When you short shares, you’re technically borrowing someone else’s stock and selling it. The person you borrow from needs to be compensated for loaning you his/her stock.

5) You have to pay the company’s dividends while you are short.

If a company pays a dividend while you’re short its shares, you must pay that dividend out of your own pocket. This is once again to compensate the investor who loaned you the shares in the first place.

6) Shorting is a timing game. You do not “short and hold.”

It costs money to hold shorts (see numbers 4 and 5). Do not hold your short for an extended amount of time unless you believe the company will go to $0. Usually, the risk to reward of waiting for bankruptcy is not worth it. Especially when the stock is already at a very low price.

7) Price action in an uptrend is different than in a downtrend.

Prices “take the escalator up and the elevator down” in stocks. Longs tend to pop and then form a base. Shorts tend to fall hard and then sharply retrace. Be aware of this difference and manage your trades accordingly.

8) As stocks fall, they become more volatile.

When the market falls, stocks become more volatile. As a short seller you must be ready to take your profits off the table. Some of the strongest rallies occur in bear markets. Unrealized profits can disappear fast. These sharp volatile up moves in bear markets are called “short squeezes.”  

9) Bear markets have a shorter cycle and shorter lifespan.

Bull markets last around five times longer than bear markets. Manage your shorts tightly and don’t stay overly married to the bear. The bull will eventually return.

10) Shorts decrease in exposure as they go your way.

As shorts work out, they become a smaller percentage of your total portfolio. For example, imagine you’re short 100 shares of stock at $100 and it falls to $50. This means your $10,000 short turned into a $5,000 short. It’s important to try and add on the way down to maintain a desired exposure level to the short side.

These 10 short selling rules should help you in the coming bear market. Good luck out there!


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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.