No longer a dirty word: Retail investors discover ‘shorting’ stocks

The young trader must have known that he would ruffle some feathers when he wrote to the 56,300 members on the ASX Stock Tips Group Facebook page: “How do the people who talked sh-t about me who shorted ZIP now feel?”

Within minutes of the post on March 15, other members of the group began to criticize the post, which in their eyes was in bad shape due to the losses that many members of the group suffered after the purchase now, later paying the company’s dramatic share price fall. “Strange flex, but okay,” said one. “Hahaha pretty sh-t I’m down 20k. All good hooooold “, said another.

The “offensive” post from the Facebook group ASX Stock Tips Group. Credit:Facebook

But some group members also thought from the post that they had also considered blank shares in various companies or even had active short positions themselves. Others asked how it was possible and if they could also short shares.

A little over a year ago, “card sales” was an ugly word with Australia’s growing group of social media engaging private investors.

At the time, these investors – many of whom were betting that stock prices were rising to build up their wealth – were openly discussing how to bring down institutional investors who were betting that stocks in favored companies, such as GameStop, would fall.

But in recent months, things have started to change. After two frothy years, the market has taken a turn for the worse and private investors have begun to ask on Reddit, Facebook and Twitter about how to short a company.

Traditional short selling is expensive and complicated for a private investor. It is about borrowing shares that are then sold in the hope that they can be bought back at a lower price and cash in the difference. And you have to use a decent number of stocks to make it financially worth it.

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So instead, investors are now exploring new ways to make money on stock price falls and using the term “shorts” to describe these methods. This includes using risky financial products, so-called contracts for difference (CFDs), to bet that the share price will fall. It also includes exploring the benefits of exchange-traded fund “bear market” products (known as Inverse ETFs) that are designed using different derivatives to take advantage of a decline in the value of an underlying benchmark.

Angel Zhong, a senior lecturer at RMIT University whose research specialties include trends in private investor trading, says Google’s search data show that “CFDs”, “short” sales and “options” received more than a 50 percent increase in the discussion of very popular Reddit forums. ASX_Bets this year.

“The recent Gamestop trading frenzy has further attracted the attention of retail investors and shifted the investment culture to short selling and the underlying strategy of making a profit by investing in the decline in asset values,” says Zhong.

The WallStreetBets forum on Reddit Inc has driven a lot of pricing on GameStop and other companies.

The WallStreetBets forum on Reddit Inc has driven a lot of pricing on GameStop and other companies.Credit:Bloomberg

The Reddit ASX_Bets community has 90,600 members. The majority of the members are long on shares and want the share prices to go up. But the group’s moderators say some traders are beginning to explore how to make money on the downside or stock price movements or how to hedge their bets.

“When it comes to money in falling markets. It is difficult to say that private investors do not have the right to make money in all markets “, says one of the group’s moderators, The_lordofruin. “The rich and powerful do it, why not us? We are making hay when the sun is shining, why not take konsh-t when it appears and at least make it manure.”

The moderators also note that the interest is a reflection of the current situation in the market, which despite being far from a bear market is still not as hot as it once was.

“The reality is that when markets are hyperinflated after going through this epic bull, the downside is inevitable. Every private investor who realizes this and realizes that they can profit from it simply becomes a better trader,” says one of the group’s other moderators. , Taken82. The group’s third moderator, McF — ing, says that short-circuiting is an integral part of price discovery. I have a problem with someone doing the opposite? “

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Sebastian Arevalo, a 23-year-old law student from Perth, began taking short positions at the beginning of the pandemic.

“There was a lot of hype around … shorting companies that were up to these crazy peaks that would probably be affected by covid,” he says.

His first short – New York-listed Delta Airlines – gave him a “shortening fever”, but it soon caught up with him. He tried to short-circuit the Flight Center, but the stock stopped and forced his trading account into liquidation. He says he has learned from his early shorts and, after quitting his part-time job at Woolies, he is investing as his main source of income.

Scott North, 32, is an active member of the ASX Stock Tips Group’s Facebook page and has also shorted shares as part of its investment strategy. Sydneysider wrote earlier in the Facebook group about short-circuit technology darling Brainchip.

“I thought it was overvalued, the technology sector as a whole sold off and it had such a retail follower and very little insto support,” says North, which trades its full-time equity. But North says that he also on other occasions invests in Brainchip’s share price going up. “Two weeks ago I went long Brainchip and held for a week.”

North uses CFDs to bet that the stock price of a stock will fall, but he is aware of the risks of these products that allow investors to magnify their bets by up to 20 times the actual value. Using CFDs to short equities was particularly popular during the global financial crisis of 2008 and 2009 when market losses prompted private and professional investors to look for ways to monetize the market.

But while these instruments can bring big unexpected gains if a bet pays off, they can also see an investor lose more money than they put up on the original point if the bet is wrong. “Most shorts are on loan, so I think not everyone should use them – but people who understand markets should do so,” says North.

Alex Vynokur, CEO of exchange-traded fund specialists BetaShares, says that most private investors are looking for “long positions” or long-term investment products rather than short-term funds.

“Net flows across the Australian market total over $ 3 billion in total and only $ 70 million are in short-term funds,” he says.

“And it’s people who really want to protect their portfolios against disadvantages, in principle against further disadvantages.”

Changing perspectives must be reflected in ETFs, says BetaShares CEO Alex Vynokur.

Changing perspectives must be reflected in ETFs, says BetaShares CEO Alex Vynokur. Credit:Janie Barrett

CFDs also note that the rate of investment in short positions, although growing compared to two years earlier, is also much lower than those customers who want to spend long points on stock price movements.

IG Markets, headquartered in London but with a large Australian presence, has discovered that traders are discovering that CFDs offer more than just leverage.

“We are now beginning to see younger private investors recognizing other aspects of a CFD product. They offer traders the flexibility to go long and short, to access and trade multi-asset classes and the ability to compensate for potential losses by securing their portfolio,” says Kevin Algeo, IG Director for Asia and Africa.

This increase is also linked to market events or geopolitical or economic events, Algeo adds. “We tend to see shorting increases on stock CFDs during event periods, such as the reporting season. When it comes to macro events, we tend to see an increase in shorts on broad indices such as the ASX, Nasdaq or S&P indices.

A spokesman for another major provider of CFDs and a significant advertiser of the financial instrument’s shorting opportunities, CMC Markets, says: “Interest in downward positions varies from time to time and depends on several factors including market volatility, which has generated more interest. recently.”

The company watchdog is aware of the change in mood in the social media forums that discuss stock tips.

Calissa Aldridge, Senior Market Supervisor, Australian Securities and Investments Commission.

Calissa Aldridge, Senior Market Supervisor, Australian Securities and Investments Commission.

“Research shows that there is a very long bias for non-professional investors, whether it is their stocks or CFDs,” said Calissa Aldridge, senior market surveillance leader at the Australian Securities and Investments Commission (ASIC).

“But we’ve also seen social media chat about shorting, and we’ve seen an increase in advertising from CFD publishers about how you can short to take advantage of the falling market,” she says.

But Aldridge says that although ASIC’s recent intervention in the CFD market to limit the amount of leverage available to private investors – for equities, it has fallen from as much as 500 times the amount invested to just 20 times – dampened investors’ losses, hundreds million dollars are still lit every quarter on CFDs sold by Australian issuers.

“CFDs, when used properly, are actually a legitimate risk management tool,” she says. “They are still very, very risky products,” she adds.

with Anthony Segaert

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