Monday, April 9, 2012
One thing that isn't intuitive to novices is that shorting is not completely symmetric with being long. Other than the restrictions and additional costs that occur with shorting a stock, you also suffer from the fact that you do not compound returns when you go short. What I mean by that is that your position gets shorter when you are winning and longer when you are losing. As an example, if you shorted a stock at 100 and it went to 10, you would make 90% on your position, however if you bought a stock at 10 and it went to 100 you would make 1000% on your position - not a fair deal. What's worse is that if the position starts moving against you, you become more at risk. Ways to overcome this characteristic of shorting is to rebalance your position or use an inverse ETF which implicitly rebalances for you (usually daily) but is usually cheaper due to less transaction costs.