This is a very lucrative idea amongst new traders. When a raging bull market is on-going, there are many traders who love to go short on the market. There are talks everywhere about the stock market bubble, talks that the market might crash someday and doomsday videos are going viral which explain how the entire market can come crashing down in the blink of an eye. This is what motivates new traders to continuously short the market during a bull run and this is one of the fastest way to lose money in the stock market!
A bull market is when the entire stock market (or majority of the stocks) is in a clear uptrend. Long term investors and traders with long positions are rewarded with good profits in a bull market. Such a bull run has been on-going since the crash of the Coronavirus pandemic in 2020 till the time of writing this article. This is where some “smart” traders get the idea of shorting the market.
Shorting refers to a trade position where the trader makes money when the price of the stock or index falls. If you want to learn more about shorting and how to do it, visit this article! The problem with shorting is that you can lose much more money than going long. If you buy a share for Rs. 100, then you can lose a maximum of Rs. 100. But if you short a share at Rs. 100, then theoretically you can lose a lot more money as the stock keeps on rising. If the stock which you have shorted at Rs. 100 rises to Rs. 10,000, then you have lost Rs. 9,900!
The higher markets soar, the riskier the markets become and the higher is the possibility of the markets crashing. It seems like a great opportunity to catch the markets at the top and make some sweet profit when the market comes tumbling down! While all this might seem logical to some people, shorting a bull market is one of the worst decisions which a trader can take!
There is a saying in trading – “Trend is your friend”. Riding a trend is one of the easiest and most consistent ways in which a trader can make money in the stock market. When markets are in a clear trend (regardless of an uptrend or a downtrend), there is a high possibility that the markets will continue on that trend for a long time. Some bull runs have continued for years and so have the bear markets. This allows traders who are working in the same direction as the market trend to consistently make money whereas traders who go opposite to the market trend to consistently lose money. The only time a trader can go wrong by riding the trend is when the trend actually reverses. But this can sometimes take months or even years to happen!
The bull run will someday come to an end and the markets will crash eventually. But continuously going against the trend of the market will make you lose a lot of money in the process. This is the exact same reason why new investors lose money in a bull market because they are always waiting for the stock market to crash to get the perfect opportunity to start investing. To read more about this, visit this article – Is waiting for a crash a good strategy?
Another flaw with shorting a bull market is that traders try to find the top of the market. This is an impossible feat because nobody knows the exact top of a bull market. There have been countless examples of stocks which have been overvalued and have remained overvalued for many years. An example of such a stock has been IRCTC. The PE ratio for this stock has been extremely high (over 200 at multiple occasions!) in 2020-2021 and is still very high till today. If a trader would have shorted the stock based on its fundamentals, then they would have lost all their money as the stock kept on rallying regardless of being overvalued. If you are wondering why some stocks trade at high PE ratios, visit this article!
You must be now wondering if there is ever a good time to short a bull market. And the answer is – yes there is a good time! A bull market can be shorted when the crash has actually begun. There will come a time when the stock markets will actually crash. At this time, the stock market will break every major support on their way. The best time to short the market is when the crash has actually begun, not before the crash. Because nobody (not even Warren Buffet) can predict the crash of the stock market!
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DISCLAIMER : I am not a financial advisor. I am not for or against any company which I have mentioned in this article. All the information provided here is for education purposes. Please consult a financial advisor before investing.
Contact me at investmentabshuru@gmail.com
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