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Short Selling: Are You “Dumb Money?”

Peter Roscoe, with 18 years of experience in financial markets, originally from Teesside, started in the finance industry but has been trading alongside his full-time job running a shooting range in Budapest for the past eight years. Roscoe shares his trading journey on a YouTube channel, discussing both his wins and losses.

Over the recent years, the advent of online trading apps has introduced new financial tools to the public, including short selling. Shorting a stock involves borrowing and immediately selling it, anticipating a decrease in its value to buy it back at a lower price and profit from the difference.

While defenders argue that short selling aids in determining true asset value and uncovering fraudulent behavior, it remains a high-risk form of trading traditionally undertaken by professionals. However, the rise of online trading platforms has enabled amateur investors to engage in short selling within seconds.

Despite the popularity, Roscoe is cautious and advises against it for those with employment commitments. He emphasizes the need for a significant time commitment and continuous market monitoring, cautioning potential traders about the high probability of failure.

The surge in short selling is notable, attributed in part to the COVID-19 pandemic, as more people working from home explored alternative ways of making money. The cultural shift around discussing finances in the UK has also contributed, with individuals now openly sharing their stock portfolios and experiences on social media.

Activist short sellers, such as Carson Block from Muddy Waters, have gained prominence. These traders not only bet against companies but also publish detailed research, accusing firms of dishonesty to drive down stock prices. Block sees their role as providing transparency and exposing misleading management.

However, activist short sellers are divisive, with some accusing them of distorting the market by talking down companies. Despite potential support, even for these investors, the profession is stressful and often leads to burnout.

Roscoe and Block both acknowledge the challenges of short selling, with Roscoe citing a 30% success rate on his first 100 shorts. eToro, an online trading platform, implements protections for amateur short sellers, including suitability tests and position closures if losses exceed 50% of capital.

Retail investors, often labeled as “Dumb Money,” are individuals trading with their own money and lacking a background in banks or investment firms. The risks associated with short selling are highlighted by the movie “Dumb Money,” which depicts the GameStop shorting saga and the losses incurred by many online amateurs.

Even for an experienced trader like Roscoe, short selling constitutes only 5% of his activities, with specific rules for celebrating wins, such as going out for a steak dinner with the family or investing in a bottle of whiskey.

by Paul Britton

Full-time CBG author covering everything from business to wellbeing news, in Cyprus. and abroad.

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