Shorting the Market: A Complicated and Tabooed Business
The market is for the most part a complicated business that demands intricate knowledge, expertise, and risk-taking.
While “complicated” does not necessarily mean “difficult,” it entails a level of understanding many individuals lack. One of the most complicated aspects of the market is shorting, which involves betting on the market getting worse and prices trading lower.
This article will explore the definition of shorting, how it works, and some of its philosophical and psychological complexities. We will not be looking into strategies for shorting.
Defining long and short positions
Before diving into the specifics of shorting, it is essential to define long and short positions.
Being long in the market means an individual is optimistic about a particular asset’s future and expects its value to increase over time. Long positions can be opened by buying the asset itself, trading futures, or using options.
In contrast, shorting involves betting on the market getting worse and the asset value decreasing. This process requires borrowing at current prices, selling them with the promise to repurchase them later at a lower price, and pocketing the difference. However, the lender of the assets sets a “liquidation price” to minimize risk, and closing a short position always involves a “buy” event.
Complications of shorting
One of the complications of shorting is that the lender of the assets will not let the borrower run the value of their investment to zero. Therefore, the lender sets a liquidation price to protect their investment. Another complication of shorting is that it requires going against human nature, which is to be optimistic and hopeful about the future. It requires individuals with a strong sense of self and little attachment to the community. As a result, shorting is often viewed as taboo.
The psychological implications of shorting
Humans are wired to look forward to the future and believe things will improve. This powerful survival mechanism makes shorting a taboo in the trading community.
Shorting requires going against the collective bet on survival, which can result in ostracism or being kicked out of the community. The negative connotation associated with shorting is due to the psychological mechanism of recognizing someone who goes against the tribe and must be removed.
Going short is a complicated and taboo business that requires a unique set of skills and personality traits. However, shorting can be a profitable journey for individuals who can bypass their natural instincts.