Readers of my Better Spread Betting, Position Trading and Stop Orders books will know that I am predominantly a long trader; and some of you might be wondering why. It’s not for any moral reasons (e.g. “short selling is bad”) but for the following reasons:
- In the long run, stock markets generally rise, but I wouldn’t read too much into this.
- In the long run, long equity positions pay dividends, though not very many at the moment.
- In the current low interest rate environment, the cost of financing a long position is low compared with the potential capital appreciation.
- The price of any financial instrument (and in particular any one of my bombed-out favourites) can rise much farther than it falls; therefore the upside potential is far greater than the downside risk.
Taking item #4, what’s the point in betting £1-per-point that a 10p-per-share stock will halve in price? I know the answer to that one is to stake £100-per-point short instead, but then what if the price doubles overnight? Or worse? In contrast: a negligible-risk £1-per-point “starting bet” on 10p-per-share stock that used to be 1000p-per-share could be very lucrative eventually, especially if pyramided to higher stakes along the way.
Note that I am not predicting that the markets or my individual stock picks will rise rather than fall for here. I really have no idea what will happen, but I do know that I have more to gain (relative to my risk) by betting on a rise rather than a fall.