Tesla (NASDAQ: TSLA) is the largest automaker by market capitalization at $622 Billion. The EV maker’s stock was the second-largest US short behind Apple after a 65% price falls in 2022. Investors made $15 billion in 2022 by shorting Tesla stocks.
The stock’s volatility was driven by the company CEO, Elon Musk, market speculators, and macroeconomics, among other factors. In this article, you will come to know about how to short the Tesla stock.
What is Short Selling?
Short selling is a method of trading that seeks to profit from the decline in share prices. This strategy requires short-sellers to identify shares poised for a downswing and bet on them.
When shorting the Tesla stock, you would typically borrow the shares from a brokerage and sell immediately at the current stock price. When the stock prices decline, you will purchase it at a lower price, return the shares to the broker, and makes a profit from the difference.
Assuming you borrow 10 Tesla stocks and sell them on the stock market for $196 each, you would generate $1960. If the share price drop to $186, you can buy 10 shares at $1860. This would make you a profit of $100.
Short selling is a practical way to make periodic profits during a bear market and bull market. For instance, Tesla stocks declined sharply in 2022 and lost $700 billion in market cap. This decline was fuelled by the controversial Twitter takeover, with Musk needing to sell some of his Tesla stock to fund his bid.
However, short selling also carries many risks, and it's easy to lose money when the prices of the stock increase. Take another instance here, after recently announcing the slashing of Tesla’s car prices, stock prices reduced as many investors sold off their stake in the EV car market. However, prices have rebounded as the stock market warmed up to the news of share prices consolidating after positive earnings results for 2022.
How to Short Tesla Stock?
You will need to open a margin account with a reputable stock broker before you can short-sell stocks. Many stock brokers provide the traditional method of short selling, where you outrightly borrow the Tesla stocks.
Using derivatives like CFDs and Options is another way to short stocks. This is more complex and requires experience. With this option, you’ll not have to own the Tesla stocks but speculate on stock's price movement.
Tesla stock is a favorite for traders who like to bet on short-term stock price movements due to its volatility. Speculators, the economic model, and Tesla’s controversial CEO are some of the reasons that influence periodic price changes.
What Are the Ways of Shorting Tesla Stocks?
There are two main ways to short Tesla stocks, but your choice will depend on your brokerage account and experience.
Traditional Shorting the Stocks
This is the most popular option, allowing investors borrow stock and short the stocks directly. Depending on your broker, you’ll need cash or stock equity in your account that acts as collateral. The federal reserve demands that the collateral be 50% of the short position value; however, some platforms may have stricter requirements, higher than 50%.
Remember that you cannot short-sell shares with a standard brokerage account. Your preferred trading platform must provide a margin account and authorize it to borrow shares or funds.
These are financial instruments, such as Options, CFDs, and Futures, that allow investors to participate in the stock market without owning the underlying assets. You need not borrow the Tesla shares with derivatives because you are speculating the prices.
Derivatives require traders to open and choose a ‘sell’ option on the deal ticket, opening the short position without buying the actual shares. For instance, you can use CFDs which involves purchasing a contract to exchange the difference between the opening and closing price of the stock.
The CFD contract will allow you to short-sell the Tesla stocks by opening market positions to sell the stock after a price decline.
Guidelines for Shorting Tesla Stocks
To start short-selling Tesla stocks, you must open a brokerage account on online trading platforms like eToro and IG followed by the step-to-step guide described below.
Step 1: Open a Margin Account
Step 2: Funding
Step 3: Open a Short Position
Step 4: Cover the Position
Disadvantages of Shorting Tesla Stocks
Traders must consider the following risks when shorting Tesla stocks.
Unlimited Losses: Short squeezes could lead to massive losses when prices rise sharply. For instance, Elon Musk announced better-than-expected Q4 2022 results leading to an aggressive price increase.
Betting Against the Trend: Tesla stock has performed exceptionally well over the years, and long-term shorting of the stock would be betting against an established trend.
Costs: When shorting the Tesla using a margin account, you will incur costs, including loan interest and commissions. Costs can add up when you hold the stocks over time.