As stocks decline, Retail Investors are Obsessed with Shorting Stocks.

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Small-time traders have been attempting to recover losses by betting against the market after a difficult few months.
Retail investors, who assisted in driving stock prices to record highs, are already experimenting with a new strategy: betting against the market.

Even before the most recent stock market decline, 61% more newly established short positions on the trading site eToro from January to August of this year than in 2021 and 41% more than in 2020. As a result of their bets against well-known indexes, some of the most significant US exchange-traded funds are raking in historic sums of money.

For retail traders, it’s a significant shift in strategy. Small-time investors hurried to create trading accounts and poured money into stocks after being attracted by the sudden market surge and supported by stimulus payments during the epidemic. Others are employing short positions to recover some of the losses from the previous few months, while others have fled the market’s downward spiral.

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Before this year, Connor Furlan, a 29-year-old consultant from Chicago who had never shorted anything, had no idea how the markets were being rattled by inflation and the European conflict. His whole portfolio was in long positions the previous year. He now holds around 50% of his portfolio in short positions, mainly through the ProShares Short S&P500 ETF (SH) and the Direxion Daily S&P 500 Bear 3X Shares ETF (SPXS), along with 25% of his cash in money market funds and 25% of it in value-oriented stocks.

I need to be strategic right now and defend myself, he added. “In my perspective, there isn’t a trigger at the moment. Everyone is terrified.

Effectively betting on an asset’s decline, taking a short position is often reserved for hedge funds and other large investors. There are a few options for retail traders to accomplish this: A “put” position purchased through an options broker, a short sale made through leverage trading, or purchasing an inverse exchange-traded fund that appreciates the value of its underlying asset declines.

It’s a dangerous tactic. If the asset rallies, which has often been happening in the stock market lately as violent swings frighten investors, taking short bets can quickly backfire. Also, the potential negative that short-sellers may experience is sometimes beyond bounds. However, for those willing to take a chance, the tactics can give people a feeling of agency when the markets appear to be out of control.

Placing a Drops Bet
Investors have little reason for optimism as the Federal Reserve rapidly raises interest rates to combat inflation, Europe’s energy situation worsens, markets in the UK are volatile, and so on.

Through the end of the third quarter, the S&P 500 Index was down roughly 25%, which ranks as the third-worst performance for the year since 1931. The benchmark saw its strongest two-day surge since 2020 to start October, but that rally petered out on Wednesday.

Max Gokhman, chief investment officer at money manager AlphaTrAI Inc., stated that “the current reality for the average retail investor is far from rosy. Everything from the decline in cryptocurrency prices to the fall in meme stocks like Bed Bath & Beyond Inc. is turning traders bearish.”

As trading activity has increased this year, exchange-traded funds that utilize leverage to short indices have seen net inflows of $5.8 billion. That contrasts with total economic losses from the coronavirus in 2020 and 2021 of $11.8 billion and $5.1 billion, respectively.

The ProShares Short S&P500 ETF (SH), which offers the opposite of the benchmark’s daily performance and has drawn $2 billion, already its most significant year of inflows on record, is the most well-liked bearish product this year.

Additionally, investors are selling short conventional exchange-traded funds. Among ETFs, the Invesco QQQ Trust Series 1 (QQQ), which follows the Nasdaq 100, showed the greatest rise in short selling between mid-August and late September, according to data from S3 Partners.

James Campion, a trader on the eToro platform who goes by the handle @campervanson, is utilizing ETFs to wager against the Nasdaq 100. The ProShares UltraPro Short QQQ ETF, or SQQQ, which offers daily inverse performance three times that of the tech-heavy index, is presently his greatest investment.

The 36-year-old from Dubai added, “It’s become a major instrument to create investment returns.”

Through websites like Robinhood, TD Ameritrade, and eToro, other traders are opting to bet against certain equities. Nvidia Corp., Bed Bath & Beyond Inc., Alibaba Holding Group Ltd., Tesla Inc., and Bed Bath & Beyond Inc. are some of the most well-liked businesses to short on eToro.

According to Dan Moczulski, managing director of eToro in the UK, customers are aware of how quickly the economic situation is changing. Opening short positions have become a more widely used strategy this year as a result, since it gives investors greater flexibility to take advantage of opportunities when they present themselves.

Unsafe Moves
The rapidly changing atmosphere this year makes it simple for short-sellers to be taken by surprise. Think about how the S&P 500 dropped close to 3% last week before rising 2.6% on Monday and 3.1% on Tuesday. Most likely, individuals who gambled against the well-known index during the recovery lost money, and those who invested in leveraged inverse ETFs like SQQQ lost even more.

As more people attempt to short stocks, it is also getting more expensive. For instance, the average cost to short Cathie Wood’s ARK ETFs increased from 2.6% in mid-August to roughly 5% at the end of September.

According to Chris Zaccarelli, a chief investment officer of Independent Advisor Alliance, the dangers of shorting an investment might easily exceed the advantages. Since you’re using borrowed money while trading on margin, one of the biggest risks is that you might lose more money than you invested.

Even for experts, shorting stocks is a challenging undertaking, according to Zaccarelli. In actuality, you risk losing five to 10 times your initial investment, even if your losses are limitless. I would exercise extreme caution unless you have adequate training and expertise.

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