BBC: warning to retail traders on short selling – “don’t be the dumb money”

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In recent years, there has been a rise of online trading apps bringing new financial tools to ordinary people, like short selling.

Peter Roscoe, who has been trading in the financial markets for 18 years, said to the BBC: “I get messages all the time. ‘Hey, I want to try this day trading shorting thing.’ In the comment section, emails – minimum one a day. And I always say, ‘look, are you employed? Don’t do it’.”

“Unless you can commit four to five hours a day, Monday through Friday, and watch the market, just watch these tickers go up and down for six months, you’ve got no chance. And by the way, after that, there’s a good probability you’ll still fail.”

Despite such warnings many have plunged into short selling.

“The rise has been phenomenal,” said Dan Moczulski, UK managing director of E-Toro, which has seen shorting on its platform rise dramatically over the past three years. He points out that there are protections in place for amateurs attempting short selling on his company’s platform, but that the high risk is fundamental to the trade. Shorting is done on E-Toro using something called a CFD – a contract for difference. Part of that means users must complete a suitability test.

If a trade has racked up losses more than 50% of the capital on an account, then E-Toro will start closing the position. Also, on CFDs a customer can never owe the broker more than they originally put down on the account.

“These things separate retail shorting from institutional shorting that, as you say, has unlimited risk,” he told the BBC.

Investors who trade with their own money, and don’t have a history of working for banks or investment firms, are know as retail investors and sometimes, disparagingly as “Dumb Money”.

One kind of trader is an activist short seller, with Carson Block from the firm Muddy Waters being among the most prominent. Many times, firms like his will accuse companies of outright dishonesty, betting that their stock will fall when they outline their concerns.

“It’s a profession that has burned most of its practitioners out within a few years, and I’ve been doing it 13 years, and it’s definitely putting miles on me,” he told the BBC.

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