Short Selling Secrets: Profit From Falling Stocks

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Welcome to another episode of Talking Wealth podcast, you're on with Phil and Pedro

and today we are going to be discussing short selling, the truth about short selling.

What it is, I know this is an area that we get so many questions on from people in the

markets about what is short selling, how you can do it, who does it, what are some statistics

and probabilities around this.

So we're going to break it all down for you.

So you have a real clear understanding of this strategy or segment of the market and

how powerful it can be because for me, what most people do when they get into the market

is looking to buy, buy, and trade long, but there is this whole other area where you

can sell first and buy later and make a whole bunch of money when the market's going down.

So on that point, let's welcome in Pedro.

Here you go, mate.

Phil, good, mate.

Good.

What a topic to cover at this time, you know, with the market behaving the way it is.

Yeah.

Definitely plenty of short opportunities.

And that's probably, or pretty much what sparked my idea to do it right now because the

market's are falling and like I said, it's constant questions.

Most people don't even know.

I mean, not people in trading, I'm talking about people wanting to get involved or not

really into the markets when you say to them, you can sell something first and then buy

back later when it at a lower price.

They look at you funny and they go, well, they're supposed to sell it if, who do you

know?

If you don't know, no.

It's just a weird concept that is hard to understand and I get it.

So I think, you know, let's start off by breaking down what short selling actually is and then

move into some cool stuff.

I mean, I made this podcast quite fun and we're going to dive in the stories of people

that have done it and practical stuff where it's actually worked and how you can apply

this to your strategy because I don't know about you, but for me, you know, I always look

at the market and I've said this before in that you're playing with one hand tied behind

your back.

Like if this were a boxing match, you're boxing with one hand while the person who's

going long and shorting is using two hands and I think it's something you should know.

It's not as difficult as in terms of the practical side of doing it.

It's not as difficult as it may seem in terms of understanding the concept behind it.

In fact, do you even really need to understand the concept apart from saying, well, you

know, instead of pushing the buy button, you push the sell button first.

That's really when it comes down to practical how it's done.

And so, yeah, I think basically just, yeah, you're just making money as the stock is

falling rather than it's rising.

And you know, it's quite an important part of trading in itself if you want to become

a fully, you know, pledged trader.

Yeah.

Well, markets go up and then they go down as well.

So it's like, it's not just one way and knowing that and being able to capture those

moves, sometimes the short side, or I shouldn't say sometimes, most of the time, the short side

is where you get the quickest profit.

And it comes in because, you know, fear is obviously a lot more volatile than greed.

And we've seen it time and time again, we saw a market full 10% in like three days or four

days over the last week or so.

We saw oil jump from $60 to $120 in like two days.

And so now it's jumped all the way back down.

It felt like 30% in one day went from $120 back to $80 in one day.

So it's like, you know, these things happen quick, especially when you know what you're

doing.

So let's get back to what short selling actually is now, I mean, to keep it really simple,

it's basically, it's betting that price of an asset will fall.

Now you can short sell stocks, you can short sell, you know, commodities, you can short

sell currencies, you do it all through derivatives.

You're going to get into that in a second, but basically, it's betting that the price

of an asset will fall instead of rise.

When you buy, you're betting that the price of an asset will rise here, you're betting

that the price of an asset will fall.

And so the basic process works like this, you borrow shares from a broker, you sell those

shares in the market, you buy them back later, return the shares to the lender, if the

price falls, the trader profits.

So if a share price is trading at around $100, you short 100 shares, that's $10,000 worth,

price falls to $70, you buy back for $7,000, that's $3,000 profit.

However, if the price rises, if it goes to $150, and you've sold at $100, your loss is

going to be $5,000.

So, you know, the critical difference here though is, if you buy a stock, the worst case

is the loss of 100%, right, shorting no, because it can continue to go higher and higher

and higher.

So, it's infinite, so you've got to be mindful of that major risk there.

But if you've got stop losses in place, I mean, it's not as scary as it's made.

Yes, the loss can be infinite, but it's only infinite if you're not disciplined enough

to sell.

And the stock is used to go up.

That's right.

And a lot of the time when you're trading short, you're using something like a derivative

or CFD type where, if the price goes against you, you're pretty much, you've got a margin

call and you're out, you know, the platform will get you out before they're not going

to leave you owing their money, they're not going to send you a bill, you know, basically,

there's a certain percentage, you know, low into value ratio that they're willing to accept

and then, you know, if you exceed that, then you're out.

And that's, and that's worst case scenario.

That's if you're not disciplined enough to have a stop loss in place and sell, you're

right.

It's another failsafe where, you know, basically saying it, it's not unlimited, but

then if you move into worlds like trading options or futures contracts, you know, you've

got to be careful there because there have been stories of, you know, even on the long

side, people not rolling over a contract and then getting delivered like all these barrels

of oil, you know, which is pretty crazy.

But anyway, I don't want to digress too much, but the next thing is, okay, what is it?

Who actually shorts the market, right?

And the big, I guess, assumption in markets is that short selling is mostly hedge funds

attacking companies.

That's really where, and this is where, I guess, the ethical side of things comes into

it where people say that now about short selling, they say, I don't want a short sell

because I don't want to attack a company because they've got employees and I don't want

to, you know, hurt their share price, which could hurt their business and then hurt everyone

involved.

And so, it's like, well, I mean, on that question, I'll get your thoughts, but for me,

it's like, well, nobody pointed a gun to the company and made it go public.

The company could have stayed private.

It went public for a reason because there was, to some degree, there was that element

of greed in there to say, well, you know, we can make a ton more money once we list

public and our share price goes through the roof.

So they're willingly knowing there's a risk by going public because if your share price

gets slammed, you're going to have to deal with that factor, you know, in your business,

especially if you're borrowing based on, you know, evaluation and all that kind of stuff.

So I get it when people say that I want to short because of ethical reasons, but then

again, think is the company getting into the, why is the company getting into the public

space?

And so when we're talking about profit, what are the ethics there?

Should they have stayed private to look after their business or their employees?

You know, so, yeah, I think if you know what, if you're going to walk in the, in the

puddle, mate, you better expect that there's a chance you can get dirty.

Yeah, I mean, there's also people need to think that in the share market, it's a secondary

market really.

And, you know, if you're shorting stock, then there're the only people that that suffer

are the shareholders themselves.

And, you know, that may be directors of the company, but it doesn't mean, for example,

if you short the hell out of Coca-Cola, that suddenly the company is going to go bust.

And then, you know, they're going to be able to sell cans or, you know, drinks or anything

like that.

It's really you're shorting the value of the stock in the secondary market, regardless

of the company.

Now, if this is a sound company and it's got, you know, it's always being revenue

it's always been expectations, it's always increasing their dividends, yet their share

price is being shorted.

Eventually, that valuation of the share price will come back to reality anyway.

It has to be for it to be a sustained short, it needs to justify the fundamentals of

the company itself, I would say.

So, I think when people think about, oh, you know, it's not ethical, whatever, we'll

just remember that you're shorting the secondary market.

You're not shorting the company itself, you're not attacking the company.

It's just the share price of the company in that secondary market.

You know where I think it's probably more applicable is when you're talking about a lot

of these companies that are operating on funding, you know, maybe the smaller caps operating

on loans and you often see, you know, their share prices aren't doing amazingly well until

they hit the markers, but it gives them leverage, you know, a higher share price gives the

company leverage, maybe to access to more funds or whatnot as opposed to getting slammed.

So, it can hurt those companies, I think, you know, much, much more than people may think.

But even that said, you know, the reality is there's a wide range of market participants

that short securities.

Not just these sharks, they call them hedge fund shorting sharks out there.

You've got, yes, it is true.

I mean, I'm not, you know, there's no sugar coating, it is many hedge funds, they run long

short strategies where they buy companies that believe are undervalued and they short

companies they believe are overvalued.

I mean, you know, that is a reality.

You've got market makers, which, which often short shares temporarily as part of providing

liquidity to buyers and sellers.

So, you know, market makers are the people that allow or facilitate liquidity in, you've

obviously got liquidity providers, but the market makers are like your broke up, for example,

that if you want to buy, they're going to have to sell because it's a two way transaction.

So they're facilitating your opportunity to buy by them being short sellers and for them,

the goal is market makers is to always balance the books and not be heavily exposed to

one position, one way or the other.

So they're constantly buying and selling, but not with any direct drive to conviction

on to say, I'm selling, you know, BHP today because I think it's going to go down.

It's no, we've got, I need to sell, I need to short because I've got, you know, XYZ

buyers coming in, so I'm taking the other end of the trade and then they might hedge that

in another market with an option or what have you, you know, however they do their books,

I don't know, but, and then, you know, you know, who I think that the real, the real

sufferers of this, the real people that are suffering are the people that are, that were

the superannuation, the ones that are just blindly, you know, letting their, their, their

super people be, but may be managed.

And of course, the super is in all these shares, and now if that share gets, gets shorted quite

heavily by these big institutions, then really it's everyday people with, with their super

that, that, that get hurt and, and that would be my, my main concern.

And then on top of that, if the superannuations are actually helping to lend out the shares

to those institutions, which are then shorting it, you know, that creates a vicious cycle

and, you know, it's to the detriment of, of everyday people that don't really know how,

how the market works.

Yeah, yeah, that's a fair point.

Nice, you're being a bit of a robin hood today looking after the people, that's out.

Yeah, that's a right, yeah, I guess it's, it's not fair, yeah.

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I guess the next, the next point of who actually shorts and, and this is where, I guess,

we come into it is traders, you know, shorting is very, very common in derivative markets,

including futures options, CFDs, FX, they, all these markets allow you to trade us to

take bearish positions.

I mean, really, apart from options, you cannot short unless you take out a derivative's

account or platform, you can't just take a share trading account like a comm second and

go to short unless you're operating with some kind of derivative.

So that's important to know.

And then you've got activist short sellers.

So some investors specialize in researching companies.

They believe a fundamentally flawed or significantly overvalued.

Now we're going to get into these examples because I also think short selling is important

for the market because it alleviates this.

It alleviates broad, it alleviates scams.

You just got to remember a few years ago there was this big, big breakout, you know, event

that happened in the US market where there were these ghost Chinese companies listing on

the US stock exchange.

And these companies were promoted as big, big companies, you know, a whole bunch of assets

and all that kind of stuff.

Really, they were a tin shed in some arson part of China that no one heard about.

And it was these short sellers that caught onto that and shorted the crap out of these stocks.

And they realized that there was a big fraud going on that these companies weren't what

they said they were.

And they cleaned out the crap in the market.

So, you know, short selling is also there to keep the markets in check and keep them reasonable

now can and get exploited, yeah, sure.

But everything does one way or the other.

But there is a purpose for it.

I think a really important purpose, almost like a watchdog.

Now, you know, a few of the thing happened with GameStop, the words out of my mouth we're

going to get into.

Okay, we haven't got to that yet jumping the gunny buddy, but, you know, you've got,

you know, there are a few which we're going to get into in a second.

So, I mean, let's dive into it, you know, the next part I wanted to cover was when short

sellers exposed major frauds.

And so, Enron is a big one if you remember Enron in the early 2000s, a man called Jim

Chano, so identified accounting irregularities in Enron's financial statements and began

shorting the stock.

I don't know if you remember that.

I've heard of the Enron saga, but I didn't know the details.

So yeah, this guy identified something wasn't right in the statements, financial statements.

The company collapsed in 2001 in one of the largest bankruptcies in Newark history,

right?

And so, there was a catch out.

The second one was a one called Wild Wirecard.

Now for several years, journalists and short sellers questions, Wirecard's financial

reporting in 2020, the company admitted that $1.9 billion in reported cash likely didn't

exist.

Oops.

I don't know how we missed that one.

Simple accounting error.

It happens sometimes, right?

It's only $1.9 billion euros.

Yeah.

And the share price collapsed more than 90%, which so it should.

You know, and then the next example is one called Luckin Coffee.

Now, short research reports, race concerns about fabricated sales.

In 2020, the company admitted to inflating hundreds of millions of dollars in revenue.

Stock failed dramatically following disclosure.

There's also a really cool show that I watch recently on Netflix about the tech

titans of in India.

And it showed how there was one that was coming up and challenging the US as the tech,

like the internet revolution started.

And this Indian company, they listed on the US Stock Exchange and the owner with good

intentions to begin with, went public and realized the public game was, you know, he soon found

out that the pressure to consistently beat earnings to consistently increase sales,

you know, it hit him like a ton of bricks.

And so what did the guy do?

He didn't want to look bad and wanted to keep the company moving forward.

They, they made up, they cooked the books that cooked the books and eventually it blew

up in their face.

But, you know, there is pressure for these companies to perform.

And this is why things like this happen, which is wherein lies, you know, huge opportunities

for people that are aware and awake to the fact that you can short markets and stocks.

Let's not even talk about, you know, GFC type events or crashes and all that kind of stuff.

So, you know, there are, there are some crazy stories in short selling and maybe let's

get into a few of them because they've happened since the beginning of time.

I mean, 19, when was the, the, the pressure 19, 29 stock market crash where the market fell

about 80 percent, you think about the index falling 80 percent like, you know, we haven't

had that, I don't think since that kind of correction for the US market, they've all

been about 40 or 50 odd percent, the big ones.

So, the thing is, can it happen again?

Yeah.

Actually, at the moment, when we were on a knife's edge with everything that's going on

at the world in the world and, you know, if something was to trigger an economic collapse

or, you know, a domino effect, and I would expect it to be more linked to globalization

now because the world is more globalized than ever.

If, if the dominoes start to fall, then definitely we could trigger a, a market sell off

that, like, like we've never seen before.

Yeah.

You're right. I mean, we've got a situation where we've got inflation, not under control

and potentially spiking again out in the world because of oil.

We're projected to have low growth.

And we have geopolitical instability that really could potentially break out into a world

war.

I mean, all that said, the market has survived all these situations in history.

And so when you think about, you know, how this all plays out, it's, you're right.

I don't want to cover it too much because we're going to get into it in another podcast.

But crazy short selling stories in the market.

I mean, this is a history of things.

You know, wait, believe it or not, if the famous company Volkswagen, our company, as you

know, yes.

You know, wait, many hedge funds believe Volkswagen were significantly overvalued and heavily

shorted the stock.

Now, this is a short squeeze scenario.

Now, I want to explain what a short squeeze is now, as hopefully we're making sense here,

shorting a stock means betting on it to go down and when it gets shorter, it means it

falls sometimes dramatically, sometimes a lot.

A short squeeze is when everybody is short in the market and there aren't any more shares

to sell.

For some degree, if I'm trying to make it really, you know, basic to capture the, I guess,

what I'm saying.

And there becomes a moment where the shorting needs to start being covered, meaning that

because all the shares are being sold right now, if price starts to tick up, buying needs

to happen to offset all that selling.

The more price goes up, the buying needs to happen a quicker and if all these heavy sellers

are the ones with all the liquidity, that could cause what they call the short squeeze

where the price dramatically reverses back up.

I hope I've explained it well, but what happened with Volkswagen was, you know, it was significantly

overvalued and heavily short in no way, then Porsche revealed it controlled the majority

of Volkswagen shares through direct ownership and options.

And so with another large Porsche owned by the German state of Lower Saxony, the available

free float was extremely small, which what I mean earlier about the amount of shares left.

So short sellers rush to buy back the shares within days, Volkswagen briefly became the

most valuable company in the world by market capitalization.

Now this event is widely considered the largest short squeeze in modern financial history.

Now let's move to your next scenario and this is explaining what can happen, you know,

to the flip side of shorting as well.

I think it's important to talk about it.

The GameStop scenario in 2021, as you know, one of the most famous modern short squeezes

involved GameStop, short interest had climbed above the available share float.

So it was being bought up crazy by all the retail traders that were organizing online forums

and started aggressively buying the stock.

And the price has surged from $20 to an intraday high above $480.

Several hedge funds suffered heavy losses, heavy, heavy losses.

One fund was Melvin Capital, which required emergency capital and then was later shut down.

What I find interesting about this story though is that the retail didn't get the last laugh

because GameStop got hammered all the way back down as quick as it rose and it just proves

the point that to be in tune with the market and, you know, again, follow price action

as it's going and understand that I mean, this has been so true forever and retail does

not have the power, they think to move a market, they just don't.

And when everybody was in this GameStop, they made a Netflix documentary about it.

As it was rising, you could see people retail going, yeah, you know, to the end, y'all,

we're screwing the big, we're beating the man, we're screwing, you know, the institution,

where, where, where this, where that, no, you're not.

You do not have that volume, weight of volume in the market to control direction or power

to affect direction.

And we saw that reverse dramatically back down to those levels.

And so the big money got the last laugh and it just proves to show that if a market

is driven by retail time and time again, it does not have legs.

And I think it's an important point to mention this GameStop scenario.

Yeah.

Yeah.

And I think a lot of them were a little bit angry because Rory and Kitty, who was the

one that was leading that charge, he was out like he, he was the one that was accumulating

the whole way through and telling everybody to buy.

And then as the stock was rising, he was selling.

So he was a smart one at the end.

He got to keep all his profits and he didn't direct anybody to sell, you know, they, they

all the followers were like, well, what do we do now?

And I think this highlights such an important thing to not follow these forums blindly.

Like you have to know what you're doing.

This is a clear case of somebody who knew what he was doing.

Surely he was using technical analysis, he was using advanced analysis.

He was, I think it was a financial advisor, like he, he, he knew, um, or an, yeah, and

a trader for sure.

Yeah.

He was a trader.

Yeah.

Yeah.

Exactly.

So he was using all these techniques.

You know, I, I, surely, a lot of the ones that, that we teach and that, that we use ourselves.

And then, um, he, he was instructing everybody to sell and he knew what would happen that

as the price started rising, that these hedge funds are going to start to, to sweat and

think, oh, hold on, the, the share prices rising, we better cover our shorts.

And they're going to get in at any price available, basically.

And he knew that would happen.

He had his level set out.

He got out and everybody was left holding the bag.

And like you said, that the price and ended up falling sharply.

And, you know, to, to that point, when you short sell, like you were saying earlier,

you have to borrow the share price.

So just to give anybody, everybody a clear example, you borrow it at two dollars, you still

got to pay it back, right?

And you're paying a, you're paying a, an interest, basically, to, um, to hold that.

Then once it goes down, you can buy it back for that, for one dollar, just say, so you

get that one dollar spread, but plus whatever interest you paid to be holding that short

position.

Now, if you see that price, you get paid to hold shorts, I think the person that lends

it to you.

Oh, sorry.

Sorry.

I'm talking.

Yeah.

Yeah, yeah.

So, um, if you, if you buy it, I wonder, obviously, that's the, the, the optimum way.

But if you go to, if it starts to go to one dollar, 50, you start to sweat and you're

like, well, suddenly my profits are eroding.

So that's exactly what happened in, in this scenario, just started trailing up and then

they wanted to cover it and, yeah, the rest is history, basically, but, um, I'm interested

to see if there's some companies like that in the ASX at the moment.

Yeah.

It'll be a nice, it'll be a nice, uh, exercise to do.

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There are a few more examples.

Obviously, um, everyone knows Herbalife, right, um, the company Herbalife and, and this

was one of the most public hedge fund confrontations, um, ever, uh, and, and involved Bill Ackman,

if you, if you know the name, he's a very, um, successful, um, has been bust too.

So has experienced in the public life, his hedge fund going bust and coming back, which

is pretty cool story, um, to be able to cop that publicly and come back.

It's like, well, you got, you got some nerve, man, um, so good on him.

But he is an investor publicly shorted Herbalife, uh, and argued the business model resembled

a pyramid scheme, um, back in the day.

And now another shark of shorting is a man called Carl Icon, uh, uh, I think he's called

the shark of Wall Street.

Now, he took the opposite side and bought a large stake, the stock rose significantly

during the dispute and Ackman eventually closed his short position after several years.

Um, regular tours later required business practice changes, but, you know, they didn't

shut the company down.

Now, um, you know, it's, it's another, another thing to, to see that what's important about

that story is not all hedge funds operate the same way, right?

Um, some will be buying, some will be selling the best thing for you when you're looking

to implement this kind of strategy is like you said, like, you know, you, we always

sell in this show on the way down things often happen faster.

On the way up things often happen a bit slower.

So you have the power of, um, you know, riding quick moves, but the decision making has to

be faster and the strategy has to be, um, tailored to getting in at optimal prices on

the way down, um, which sometimes may mean doing a little bit riskier type entry entries

to capture the move because on the way down, if you wait for too, too much, um, of it

to play out, it might happen so quick that you don't get that opportunity unless you're

on the onset of a, a big downtrend, if you're in a bullish market like we are now and you're

trying to short, you're going to get creamed if you've got a long term view.

It needs to be, you know, more short term view, um, and that's important.

I think you understand how you're doing it or you overlay, you're looking for stuff

where a company is broken, um, and you sniff that out before anyone else that I think

that's the important part.

If you're looking to apply this practically, you find where you sit in this and I'm going

to trade, I'm going to trade volatility.

If I do, I need to know, am I in a bull market, am I in a bear market?

Which direction is it and tailor my strategy to that direction, um, because then I know

how to ride out the downside, leave, you know, maybe if you're in a downtrend, the strategy

is different to if you're in an uptrend, if you're wanting to trade short, because you

can do both.

You can still trade short, whether you're in a bull market or whether you're in a bear market,

it doesn't matter.

You're just betting on it to go down, but, you know, tailor to know that, how you play

that.

Um, well, that's interesting.

It actually goes back to something that you were saying off air earlier, we were having

a chat and you're talking about hedging.

So this is, I think it's such an important thing that you can actually implement shorting

into your strategy to hedge, uh, and such a powerful thing because you could actually close

out whichever position, uh, you know, you, you're pretty much betting on both directions

and then whichever direction plays out, you close the other one and there you go, you've,

you've had your bets basically, yeah, it gives you a safety net.

Like if you're, if you're fearful that the market's about to drop, um, or you're fearful

of the current situation right now, yet you're still long and you don't want to close

your shares for maybe tax purposes, maybe you've got long term views on them, but you're

worried you may get volatility and it could, um, you know, destroy the share price in the

short to medium term.

Well, if you place the opposite trade by selling, you know, an index or whatever, you're,

you're limiting that downside damage.

Just like as, uh, you know, an insurance policy on, on, on your, good way to put it, you

know, on your upside, um, thesis, basically, or your upside profits.

Um, so that's how we can also be used as a hedge, which is pretty cool.

But I'll just get into the last story before we move on, uh, into some statistics, most

investors don't know about short selling, but, um, you know, Tesla, you know, for many

years, this was amongst the most shortest stock in the world, believe it or not.

Some believe that the company's valuation was unrealistic.

However, we've seen Tesla's share price go nuts and, um, it's important to, to, to,

to again, you know, recognize this stuff, because I, I see so many people, um, when they

look to try to short, I've seen this quite often.

The first thing they say, uh, to you, and they're trying to find this correlation between,

uh, if it's the most shorted company in the world, just trading a shorts the way to go.

What if it's the most shorted company on the, you can find this info even on ASX stocks,

it's constantly printing the most shorted stock on, on the ASX.

I remember not too long ago, whether it was Paladin or, um, a lot of the Uranium stocks

lose like three that were the top short of five.

Yeah.

Well, ain't working out too good for you if you're holding sales right now, right?

So be careful, be careful with that specific, um, statistic of the market and, and don't

just assume because it's the most shorted stock in the world that or in your, uh, market

that you're looking at, don't just assume that it's, that trends got to continue down

forever.

That is not true.

Mm hmm.

Yep.

Yeah.

Definitely.

All right.

So statistics most investors don't know about short selling.

It's actually true that short selling represents a small portion of the overall market across

large developed equity markets.

Average short interest typically represents only a few percent of the shares outstanding.

Most market participants are long investors.

We know that, um, now, obviously some companies attract heavy short positions.

The majority of stocks have relatively low levels of short interest.

That is, that is a back, but markets sometimes function worse when short selling is banned.

During the, uh, I wait crisis regulars, towards temporarily banned short selling in some financial

stocks.

Uh, subsequent academic research found these bands were associated with wider bid spreads,

reduced liquidity, less efficient price discovery.

May, I remember this.

I know from, from a personal experience of someone who shorted during the, I wait financial

crisis and they shorted a, um, it was, uh, a product like, uh, one of those, not any ETFs

went around back then, but it was like a, um, uh,

kind of like an ETF type product, right?

It was just betting on the index going, you could, you buy it, but the, the product

was designed to profit from the index falling.

And I remember them, uh, saying that as it was falling, the, the provider of the product

said no more, you know, when I, when I, when I redeeming price any lower, we're

stopping shorting on this, on this product banning it.

I was like, um, that's not fair.

Yeah, that's a risk.

I mean, and they've got the same fine print on ETFs, which, you know, we're, we're getting

ready to put a whole, um, presentation on that and, uh, you know, later down the track,

but basically, yeah, uh, if it's a market maker, then they have the ability to stop you

from selling or buying shares, uh, in their product, unlike a BHP where you're buying it

from somebody else, so they can't stop you from, from doing that.

You're just getting a program between them, buying it from somebody else, but ETF,

which is why, which is why I think it's important.

We raised this point because if you're someone who's thinking, I'm, I'm going to short the

market and use ETFs to do it, understand the limitations of the product, understand that,

you know, what can happen, um, because that has happened in the past.

Hey, podcasters, are you curious to learn how you can gain more confidence with your

trading? Check out the Australian stock market show on YouTube every Tuesday night from 7 to 8 p.m.

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All right, now let's move on, mate, because I am weary of time, um, because we've spoken about

things to be weary of, but short selling, again, you know, why it's beneficial, obviously,

you know, um, I think it has a place in, in, in strategy. I think it has a place for traders to be

able to capture the whole breadth of the market, um, the whole direction of the market.

Um, I think it has a, you know, sometimes I hear, well, just do the same thing that you were doing

when you were buying and flip it. And you've got it, and you've got a short sell strategy.

Now, I'm, I'm not 100% sure that, that it, whilst in theory, it is as simple as that in terms

of the buying and selling. You have to remember different markets have different characteristics.

And so generally in the stock market, given it's a growth type asset, buying is what you see.

I mean, look at charter that Dow Jones generally, it's 45 degree angle, right slant at higher than

history in terms of prices generally going higher. That is also true for, for good companies as well,

or a lot of companies. Yes, they experience pullbacks, but generally speaking, whereas you look

at a currency market, which is more driven around stability, shorting, shorting plays a, has a

different impact. And then treating it as, you know, the same strategy buying for selling is much

more applicable than, than doing that in a growth type asset for the stock market. So you need to

know how to distinguish where you're going to play your shorting, how you're going to do it,

what time frame, what's the goal? Are you going to be trying to trade counter moves in uptrends? Is

that the smart way to do it? Are you going to be, you know, waiting for confirmation and trade bigger

drops? Which stocks will be doing that? Is that generally going to be the top 20? Or should you be

looking outside of that? All these kinds of things need to be implemented for shorting, but I think

made, you know, for the hedging purposes, for even just directional trading, I,

I think it's important that you learn it. If you're new here and you're wondering, what is it?

Should I learn it? Yeah, I'm going to say you should.

Yeah, absolutely. I mean, we cover short selling in our CFD and Forex course, and it's such an

important part of your skill set in trading, basically being able to make money on the way down

as to the way up. And for me, that's one of the main benefits. And the second one is, like you

mentioned earlier, you can make money a lot faster on the way down because markets move up in

stairs, move down in elevators, basically. And the last one is hedging, you know, which we

covered earlier as well. I think that it's an awesome strategy that you're able to hedge. And for

me, the main avenue and the main platform to use, I would say CFDs for shorting. So you don't

have to worry about this whole borrowing the share and then having to sell it back. All these

mechanics around it. Basically, if you're doing a CFD or you're pressing is a button sell, so you're

pretty much betting that the price will go down or betting that the price will go up. You don't

own anything. You don't have to have any obligations like that. You're just profiting from the

the spread of when you sell or go short to when you buy or close out your position.

Yeah, yeah. And I think I want to leave it on this once statistic. I've been saving this

right for the end that's going to blow everyone's mind in terms of what in terms of why shorting

is important and why you should have it as part of your strategy. And this comes from one of the

findings in a financial research document from a study by economist Hendrik Bessaminder, Bessam

Binder. And, you know, this guy, the research analyzed thousands of stocks going back to 1926.

And this is the key finding. Around only around 4% of the listed companies were responsible

for the entire net wealth created by the US stock market over that period. So in other words,

a relatively small group of exceptional companies generated most of the long-term gains,

the majority of stocks either own the perform the market or delivered modest returns.

Meaning this highlights why identifying both strong companies and we companies can be

important because the majority of stocks over time, especially the ones that aren't driving

the growth in those high indexes, are probably going to end up lower by the end than higher

in terms of their share price, which creates this huge market for shorting and opportunity for

shorting. And so, again, you're not thinking about it. Learn it. If you want to get into trading,

you know, this is something you should understand. I think about implementing it as part of your strategy

because there is a hell of a lot of opportunity out there.

Oh, that's incredible, you know, and it really reminds me of what's happening today.

That most of the increase in the drive in the American market is driven by those, you know,

the Fang stocks, you know, this AI techie type company. So in Australia, it's the financials and

the miners, which are absolutely tearing to the upside right now. So, yep, could be some

opportunities there for shorting in both markets. So I totally agree, definitely. If you don't

know how to short sell, put it down as one of your things to learn. Fantastic. All right,

and if you do want to learn that stuff, go check out our website, visit our share trading

diploma. It's government accredited, guys. I've not seen another one out there that's government

accredited. So just proves to show the level of, you know, knowledge you will get if you go and do

this diploma that we do offer. But yeah, check the website out, check out our YouTube channel,

wealthwithin.com.au. We talk about shorting all the time. We show it to some degree.

Thank you for tuning in and listening to this one. Hopefully you've got a bit out of this

topic and it explains it a bit more to you. And thank you for all of your support. Please,

if you can give us that five-star review, we really appreciate and helps us continue to push

this message and put out stuff out there that, you know, can help people, hopefully. But Pedro,

thank you, mate, for joining. Oh, my pleasure, Phil. Yeah, very combo. Thank you. We'll catch you on

the next one. Bye for now. Thanks for listening to our Talking Wealth podcast. For more exclusive

content covering topics like the stock market, real estate, business, performance, and psychology,

and more, check out TalkingWealth.com today.