A tale of woe and caution against excessive risk taking.
Most traders/investors are well acquainted with the warnings against shorting stocks, and many choose not to do so. Those that do, should obviously employ judicious risk management, which seems to be MIA in this case.
Before I provide the link to the story- here’s a primer of some of the dos and don’ts of short selling that were not heeded:
- Avoid penny stocks
- Don’t short in the hole
- Don’t over leverage
- Overnight positions carry much more risk
- Respect the market
- Penny stocks- stocks that are very low in value such as a few bucks or less are typically pretty volatile as they are avoided by institutional buyers and therefore typically lack volume and is subject to being manipulated by buying/selling spikes. Risky to be long, but much risker to be short since gains are limited as the stock is already near the floor.
- This refers to shorting a stock after it has already dropped precipitously. Much higher risk of a reversal move at this point.
- One can typically buy on margin, meaning the brokerage will loan you money based on the amount in your account. In order to short you must be on margin as you are selling stock you don’t own and must repurchase. As such, taking on too many shares can result in being over leveraged and at risk for bigger losses. People sometimes forget that leverage works two ways, but they only focus on the potential gains rather than losses.
- Once the market closes, anything can happen news wise that can affect the price of the stock. Day trading minimizes risk of exposure by having positions closed at the end of the day. A good rule of thumb is market = risk, so shorting overnight = more risk.
- The market has more firepower than your account by a wide margin and can vaporize it if you allow it to. As such, you have to manage risk.
So what did this guy do:
He shorted over 5700 shares of a penny stock at $2, thinking it would go to $0, and left it on past the market trading session.
……and this is what ensued: