The pandemic attracted speculators to make short sales and the level of risk they face is very high. Therefore, regulators chose to protect investors.
Tali Salomon *
In the midst of the coronavirus crisis, the governments of Spain, France, Italy, Belgium and Greece chose to suspend the permission to operate short or “short” sales, in some cases for up to a month. In the United States, some voices ask that the same be done.
What are these operations and why were they banned at a time when the European and United States stock markets have fallen between 20 and 30% since February 1?
A Bloomberg report noted that investors earned $ 50 billion from their short trades between February 24 and March 3 last. Looking at it positively, this could have helped a number of people cushion the losses of their equity portfolios.
But it is not forever.
“A long-term investment strategy always starts from generating a diversified portfolio, preferably in various asset classes (stocks, currencies, indices, etc.). In the financial markets, it can be said that in the long term everything tends to rise, and that is what investors around the world expect, ”says Tali Salomon, CEO of eToro for Spain and Latin America.
“For the short term, there are tools such as short sales, a speculative practice that is done when you think that the value of a financial asset is going to fall. Whoever carries out the operation expects to obtain an economic benefit from a hypothetical future drop in the price of the securities. If, on the other hand, the values rise, the investor would suffer a loss ”, he describes.
This type of activity generates a very high risk, since even more than 100% of the traded capital can be lost, since the shares do not have a ceiling that limits their increases. That is, those who buy shares in a normal operation, the greatest risk they can face is losing all the amount that they initially invested. In the case of short sales, losses can far exceed the amount of the initial operation.
It must be repeated: short sales are mainly concerned with the short term, to take advantage of the fact that markets tend to experience falls in prices more quickly than increases.
“The pandemic attracted many speculators to make short sales and the level of risk they face is very high. So some regulators in Europe chose to protect investors and help end the market panic by restricting short selling, “explains the directive.
This type of measure is very successful for extreme situations, but in the end, a short, medium or long-term investment strategy should always be based on a diversified portfolio and consistent trading of stocks and other securities.
* General director of the eToro investment platform for Spain and Latin America.
The opinions of this article are the responsibility of the author and independent of the editorial line and position of Fortune in Spanish.