Other than the direction, I used to think that short selling is the same on the long side.
I found that is not true and here is why
When you short, you can lose more than your capital
Imagine you short a stock at $50 and it goes to $0. Your gain is $50 or 100% gain. This is the maximum gain you can get. On the other hand, if the price continues to go up to $100, or $200, or $300… You can lose more than your capital with 200% or 400% or higher – the sky is the limit! And this is without any leverage. It is definitely not a position you want to be in.
[Free Ebook] How should you invest your first $20,000?
We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
Yes. Of course you can put a stop loss to it. In fact, you MUST always have a stop loss when you short anything.
On the long side, you buy a stock at $50, the maximum loss you can potentially realised is 100% of the $50 you invested. If it goes to $200, you can enjoy 400% gain.
This asymmetry in profit/loss profile is depicted on the chart below.
Exercise caution when you short! Risk management!