What is shorting US stocks and how to short US stocks
Unlike A-shares, another feature of US stocks is that they can be shorted. Using the short-selling mechanism of US stocks, we can earn the difference.
So what is the short-selling mechanism of US stocks? How do we use U.S. stocks to short?
Today, let's talk about the short-selling mechanism of US stocks.
What is shorting in US stocks
We all know that as long as it is a stock, there will be ups and downs. Under normal circumstances, we all use the stock price to rise to make money, but shorting is the opposite, using the stock price to fall to make money.
When we estimate that a certain stock may fall, we first find a broker to borrow these stocks, and then sell them to investors in the market at the current price. When the stock price falls, buy the stock back at a low price and return it to the brokerage. By selling high and buying low like this, you can make a profit when the stock falls.
To make it easier for you to understand, let me give you an example.
In April of this year, Xiao Wang found that the weather was good this year, and he expected a bumper harvest of grain, so he asked the second uncle from the next village to borrow 100 catties of rice, and gave the second uncle 1 catty of rice every month as interest.
After Xiao Wang borrowed the rice, he hurried to the market to sell the rice. In October of this year, there was a bumper harvest of grain, and the price of rice began to fall. Xiao Wang used the money to buy 106 catties of rice after the price reduction, and returned it to the second uncle together with the profit.
We can understand the short-selling mechanism by treating rice as a certain stock.
The initial purpose of the short mechanism is to hedge (protection)
For example, a textile company A uses cotton as a raw material, and its products are positively correlated with the price of cotton. If the price of cotton rises, the price of the product will naturally rise, but the company generally uses "years" when signing contracts. The product price at the end of the year, so the "unknown profit and loss" caused by the fluctuation of cotton price in the middle of the year is all borne by Company A.
The purpose of shorting is to set the income in a "certain range". The increase in revenue due to the decrease in raw material prices will reduce the real revenue to a certain extent due to short contracts.
The current short-selling mechanism has become a new type of transaction: instead of holding physical objects, it is directly based on the judgment of the future price trend of the product. Settlement can be done after expiration. However, you need to deposit a margin for shorting. Once the margin is lost and it is not recovered in time, it will be "game over". This process is what we usually call "liquidation".
Combining with my country's current national conditions, the tradable products open to short selling are very limited, and a short-selling agreement needs to be signed, and even a video must be taken and saved during the signing process (similar to the process of buying wealth management in a bank); In the financial trading center, basically every type of product has a corresponding short product.
How to short US stocks
After understanding the mechanism of shorting perfect stocks, let's talk about the method of shorting US stocks.
1. Short U.S. stocks directly
By borrowing stocks from a brokerage to go short directly, for example, I had a premonition that Pinduoduo’s stock price was going to fall, so I quickly borrowed Pinduoduo’s stock from the brokerage, sold it to investors, bought it back when Pinduoduo fell, and returned it to the brokerage.
2. Go short by buying and selling stock options
Many corporate stocks in the US stock market have their corresponding options, such as one-month, two-month or one-year terms.
Buy short options directly by shorting stocks through options.
3. Buy options corresponding to the index to go short
Like A-shares, U.S. stocks have the Dow Jones Index, S&P 500 Index, and Nasdaq 100 Index. We can go short by trading index options.
The above are several common methods of shorting U.S. stocks. In addition to the above three, there are also short-selling ETFs and short-selling using futures. Due to the high difficulty, individual investors do not recommend such operations, so I will not say more, and interested friends can understand by themselves.
What to pay attention to when shorting US stocks
1. Need to pay margin and interest
The profit that may be gained by short selling is limited. If the profit of the brokerage company is also removed , the risk is even greater.
2. Need someone to buy your stock
At the beginning of this article, I gave the example of Xiao Wang borrowing rice. Let’s imagine what if Xiao Wang borrowed rice, but no one bought it at the market?
Then these rice are folded into Xiao Wang's hands, and Xiao Wang has to pay interest every day for this.