Hatch doesn't offer the ability to short shares, we’re building a long-term investing platform for Kiwis and shorting shares doesn’t really fit within our philosophy. However, you can access some inverse ETFs through Hatch. Investing in these exchange-traded funds allows you to make money when the market or the underlying index decreases in value - some investors in our 2020 Stockpick challenge did quite well with these when the markets dropped in March.
Some of the Inverse ETFs on offer are ‘leveraged’ (i.e. they go up or down in value 2 or 3 times as much as the index they are tracking - but in the opposite direction). They allow you to double or triple down on your beliefs, but do increase your risks of losing money.
If you’re thinking of investing in inverse ETFs, it’s very, very important to know what you’re buying. They don’t behave in the same way as other ETFs and getting it wrong can lose you a lot of money. Stop-loss orders can help you limit your losses, but it is very much a case of buyer beware!
What is shorting anyway?
If you’ve watched the classic movie The Big Short (which we highly recommend by the way), you’ll know that some investors bet against the share markets.
They believe that in the short term, a company, industry, economy or even the global markets will decrease in value. So, they pay someone who owns shares to ‘borrow’ them for a certain amount of time. They immediately sell the shares at today’s high price, hoping to buy them back again at the new lower price before they have to return the shares to their rightful owner.
As you can imagine, it’s a highly speculative investment, and while you can pocket a tidy profit if you guess correctly, there’s no limit to how much share prices can increase (and therefore how much money you can lose). For example:
- You borrow 5 shares
- You sell them for $100 each and get $500
- When the time comes for you to buy them back and return them to their owner, you could be paying literally anything - If the share price had risen to $1,000 a share, you’d have lost $4,500, if it was $10,000 a share, you’d lose $45,500.