Shorting can be injurious to your portfolio

by khalid on 15/10/2011 · 1 comment

As per the theories framed the thriving derivatives markets in place investors should be able to benefit from stock prices falling as much they do from a rise. In a situation where one knows the market would keep slipping for sometime then short selling is a great avenue to pool up some money. Buying put options, selling index futures, or simply selling highly valued stocks could help in making big profits.

But in reality all these strategies are extremely risky. The reason behind that is one can make profits from them only if the markets head steadily down and one can anticipate that well in advance. In actual scenario stocks of the bear markets don’t drift down in a very gentle manner or an orderly fashion. Instead in bear markets the market behaves in a strange manner and react the exact opposite of the mostly anticipated moves. The same was witnessed in the year 2008-09 which was the most vicious one in the recent times.

The experience from the crash in the past years clearly tends to indicate that stock prices move up and down ahead of profit changes in the India Inc. The fall of 2008 preceded earnings slowdown of most of the companies and then the markets took off before corporate profits had chartered the recovery.

Bell the Bull says: Although shorting in the situation of a bearish market seem to be the way forward shorting of securities may prove harmful for your portfolio.

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