The pandemic has introduced a new wave of investors. Some are in it for the thrills, some for the long haul, while others want to trade tactically. The latter are in luck as traders now have more tools than ever before. Hence, these market participants can express conviction not just during bull runs, but also during market downfalls – all without having to deal with a margin account.
What is short selling?
It involves:
1. Borrowing shares from a broker;
2. Immediately selling them (with the expectation that the stock price will fall).
If the price falls indeed, the trader can buy back at a lower price, return the borrowed shares to the broker, and pocket the difference as profit.
Requirements
Traditional short selling can only be done via a margin account.
This means:
1. The investor must be approved by the broker;
2. A significant amount of the investor’s capital is required.
Additionally, the investors must abide by the brokers’ equity requirements to maintain their short position open. Other alternatives like using options, futures, and structured products come with their fair share of risks and complexities.
Going Short Using ETPs
The advent of exchange-traded products has allowed investors to go short by being long (pun intended). By purchasing inverse ETPs, investors can get short exposures to a wide array of securities. These include single stocks, broad market ETFs, sectors, and even thematic ETFs.
How do they work?
Inverse ETPs aim to offer daily inverse exposure – hence, if a particular instrument falls by 1% on a certain day, the inverse tracker is expected to gain on that day. The exact amount will depend on the leverage factor and fees involved.
