The “Shortists”, those who earn when the stock market goes down
Who are the “ shorters ”?
Simple, all those who sell to earn on the downside.
The normal investor doesn't even imagine that you can make money with declines, and yet you absolutely can.
I explain in a simple way how it works and why, sometimes, there are nights when they have a restless sleep.
In the financial markets it is possible to borrow a share (providing a percentage of the price as a guarantee), sell it on the market (say at 100) and if everything goes down, buy it back at say 80 earning 20. In this example our shorter earns, because he buys the same share back at a lower price and returns it to the person who lent it to him. He pays the interest over the time of the loan and is happy.
It is called "short" because it is very expensive to hold a bearish position for a long time because the stock is on loan and you have to pay an interest rate. Furthermore, the time in which the stock markets are upwards is statistically much longer than they are downwards, but it is also true that the declines are short in duration, but are much more violent and with significant downward swings. For this reason our bearish must hit the right timing otherwise it will be painful.
What happens if the stock doesn't go down or even goes back up, as happened on 8/9 April after the suspension of EU duties?
If our shortist has rented the share for a month and sells it, and if in order to have the share available he has given a guarantee (margin) of 5% or 10% of the value and instead his share goes up, not only does he lose, but if the increase is greater than the margin he is forced to immediately buy back that share and loses all his margin.
Now the thing that those who use a margin to buy or sell a stock fears most are the overnight swings made when the market is closed. Because if something happens during the night that causes, for example, the market to rise significantly and the next day at the opening his short stock (sold downwards) rises by a value greater than the margin… The broker or bank that carried out the operation automatically buys back the stock and the shorter loses everything. This is what is happening on 9/10 April with Wall Street closing at 10pm Italian time with the Nasdaq at +12% while the European markets had closed at 5pm (before the news) in heavy decline.
When European stock markets opened on April 10, many stocks opened with rebounds of more than 10% and many shorters were forced to cover. Many have lost everything.
In the figure, as a concrete example, we report the graph of STMicroectronics listed on the Milan stock exchange: on April 9th STM closed at 5.30 pm at 16.615 euros (indicated with no. 1) to reopen the following day at 9 am at 19.217 (2) with a price hike of over 15%. In that case all the shares sold short with a 10% margin were closed automatically and the bear lost the entire margin. I have indicated a real graph to exemplify, but it must be said that when these sudden and nocturnal changes occur throughout the price list and even throughout Europe, many lose and sometimes even put the financial brokers who guarantee for the amounts exceeding the client's margin at risk.
These very important swings can also have systemic effects of failure of entire financial brokers. Those who go short and those who trade must be aware of these situations.
More generally, activities on the markets in periods of high or very high volatility can then transfer to the real economy due to the failures of large hedge funds, brokers or even banks.
Edited by Primo Gonzaga
(The graph in the figure was taken from Investing.com, with thanks).
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The article The “Shortists”, those who earn when the stock market drops comes from Scenari Economici .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/gli-shortisti-coloro-che-guadagnano-quando-la-borsa-scende/ on Mon, 14 Apr 2025 21:07:34 +0000.