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How to Short Tesla – Beginners Guide [2024]

Quick Answer: How can you Short Tesla?

To short Tesla, open a brokerage account, select Tesla (TSLA) stock, choose the short sell option, decide on the number of shares, and execute the trade. Monitor the market closely for changes. Ensure you understand the risks and have a strategy for covering your position.

 

Investing in Tesla stocks usually involves buying shares and profiting from their growth over time. However, another investment strategy is “short selling,” where you can profit from a stock’s decline. Tesla, known for its electric vehicles and revolutionary technology, has been a popular choice for both buying and shorting. This comprehensive guide aims to teach you how to short Tesla and delve into the essentials of short selling.

Step-by-Step Guide to Shorting Tesla

To short Tesla, you’ll need to:

  1. Open a margin account with a brokerage that allows short selling.

  2. Fund the margin account.

  3. Locate Tesla shares to borrow.

  4. Initiate a short position, effectively borrowing and selling the shares at the current market price.

  5. Cover the short position by repurchasing the borrowed shares, ideally at a lower price, to return them to the lender.

visually represents the process of short selling Tesla stock, with an emphasis on charting effects and no text. It incorporates a modern chart with a downward trend and abstract icons to illustrate the key steps of short selling

Please note that short selling is risky and not suitable for everyone. Be sure to understand the risks and costs involved. For more information on CFDs, please find our page Best CFD Trading Platform UK.

 

Short Selling Broker Comparison Chart

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81% of retail CFD accounts lose money
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Understanding the Basics of Short Selling

What is Short Selling?

Short selling is an investment strategy where you sell a borrowed asset, typically stocks, with the intention of buying it back at a lower price to return to the lender. If the asset’s price falls, you profit from the difference between the selling price and the repurchase price. However, if the stock’s price rises, you incur a loss.

How Does it Work?

Here’s a simplified explanation:

  1. Borrow Shares: First, you borrow shares of the asset—Tesla, in this case—from a brokerage or another investor, often via a margin account.

  2. Sell the Shares: You then sell these borrowed shares at the current market price.

  3. Wait for the Price to Drop: After selling, you wait for the asset’s price to decrease.

  4. Buy Back the Shares: Once the price falls to a level where you’re satisfied with the profit, you buy back the same number of shares at the new lower price.

  5. Return the Shares: Finally, you return the borrowed shares to the lender or brokerage. You keep the difference between the price at which you sold the shares and the price at which you bought them back, minus any fees or interest.

Risks Involved

Short selling comes with significant risks. Unlike buying stocks, where your maximum loss is limited to the amount you invested, short selling stocks has theoretically unlimited loss potential. If the Tesla stock rises instead of falling, you’d have to buy it back at a higher price, leading to losses that could exceed your initial investment.

Margin Calls

When you short a stock using a margin account, your broker may issue a “margin call” if the stock rises significantly. This means you’ll need to add more funds to your account to maintain the short position or close the position at a loss.

Regulatory Considerations

Short selling is subject to specific regulations, In the UK – FCA. In the U.S. SEC’s “uptick rule,” which states that short selling is only allowed on an uptick or a price that is higher than the last traded price. Make sure you understand these regulations before engaging in short selling.

Step-by-Step Guide: How to Short Tesla Effectively

Shorting Tesla or any other stock requires a clear understanding of the mechanics, risks, and available methods for short selling, shorting Tesla is possible with a Trading 212 account.. Below is a step-by-step guide that not only outlines the process but also reviews different methods you can use to short Tesla effectively relatively low risk.

Different Methods to Short Tesla: A Comparative Analysis

When it comes to shorting Tesla, you have several options, each with its own risk-to-reward profile. We will explore the two primary methods: Traditional Short Selling and Using Derivatives like CFDs and options.

 

Traditional Short Selling: How it Applies to Tesla

Traditional short selling is the most straightforward method and follows the steps mentioned in the “Quick Answer” section. Here’s how it specifically applies to Tesla:

  1. Open a Margin Account: Choose a brokerage that allows short selling and open a margin account. This account will enable you to borrow shares of Tesla for selling.

  2. Borrow Tesla Shares: Once the account is funded, you will need to locate Tesla shares to borrow. Most brokerages facilitate this.

  3. Sell the Shares: Sell the borrowed shares at the current market price.

  4. Monitor the Stock: Watch Tesla’s stock and any news that could impact it. Remember, the aim is to buy back the shares at a lower price.

  5. Buy Back and Return Shares: When you feel Tesla’s stock has fallen enough, you buy the same number of shares back and return them to your brokerage to close the short position.

  6. Profit or Loss: The difference between the sell and buy prices, minus any brokerage fees, is your profit or loss.

  7. Risks and Costs: This method involves paying interest on the borrowed shares and is subject to unlimited loss if Tesla’s stock rises significantly.

Using Derivatives to Short Tesla Stock Price Falls: CFDs, Puts, and More

If you want to avoid borrowing shares, you can use derivatives like Contract for Differences (CFDs) or options to short Tesla.

  1. CFDs: CFDs are contracts that allow you to profit from price movements without owning the underlying asset. You would open a “sell” CFD if you expect Tesla’s stock to fall.

    • Pros: No need to borrow shares; typically lower fees.

    • Cons: Not available to U.S. residents; leveraging increases risks.

  2. Put Options: Buying a put option gives you the right, but not the obligation, to sell Tesla shares at a predetermined price (the “strike price”) before the option’s expiration date.

    • Pros: Limited loss potential; no need to borrow shares.

    • Cons: Premium costs; the Tesla stock must fall below the strike price plus the cost of the premium for profitability.

  3. Inverse ETFs: Though not a direct method, you can invest in inverse ETFs that move in the opposite direction of Tesla or the broader automotive or tech sector.

    • Pros: No need to manage individual contracts or borrow shares.

    • Cons: Not Tesla-specific; subject to decay over time.

Which Method to Choose? Your choice depends on your risk tolerance, investment strategy, and the costs involved. Traditional shorting provides a direct way to bet against Tesla but comes with unlimited risk. Derivatives like CFDs or put options offer alternatives with different risk profiles.

Essential Guidelines for Shorting Tesla: Best Practices

Shorting Tesla — or any stock for that matter—shouldn’t be done impulsively. Following a structured approach with defined steps can help mitigate risks. Below are some essential guidelines that outline best practices for shorting Tesla successfully.

Step 1: Opening a Margin Account for Tesla Shorting

Before you can short Tesla, you need to open a margin account with a brokerage that offers short-selling services. When choosing a broker, consider the following:

  • Regulatory Compliance: Ensure that the broker is regulated by a reputable financial authority.

  • Fees and Interest Rates: Check the brokerage fees and interest rates on the margin loan.

  • User Interface: The trading platform should be user-friendly with advanced charting tools for effective analysis.

Tip: Take the time to read customer reviews and maybe even test the platform using a demo account.

Step 2: Funding Your Margin Account

Once your account is opened, you will need to deposit funds. The amount will depend on the broker’s margin requirements, which can vary widely. Keep these points in mind:

  • Initial Margin: This is the minimum amount needed to open a short position. It’s usually a percentage of the total trade value.

  • Maintenance Margin: This is the minimum amount that must be maintained in the account after a position is open. Falling below this may result in a margin call.

Tip: Always keep some extra funds in the account as a cushion against market volatility.

Step 3: Initiating a Short Position on Tesla Stock

After your account is funded, you’re ready to initiate a short position on Tesla. Here’s how:

  • Research: Conduct thorough research on Tesla’s financials, news, and market sentiment.

  • Locate Shares: Use your brokerage platform to find available Tesla shares to short.

  • Set Parameters: Decide on the number of shares to short, and consider using stop-loss orders to limit potential losses.

  • Execute the Trade: Once everything is in place, go ahead and initiate the short position by selling the borrowed shares.

Tip: Keep an eye on news events that could significantly affect Tesla’s stock, either positively or negatively.

Step 4: When and How to Cover Your Short Position

The final step is to buy back the Tesla shares you’ve shorted to close out the position. Consider these points:

  • Monitoring: Regularly monitor Tesla’s stock performance and news that may affect it.

  • Exit Strategy: Have a clear exit strategy. Know your target price and the maximum loss you are willing to endure.

  • Timing: Market timing is crucial. Wait for a significant enough drop in Tesla’s share price to cover your position profitably.

  • Buy to Cover: Once ready, execute a ‘buy to cover’ order to purchase back the borrowed shares and return them to your brokerage.

Tip: Be aware of interest accumulating on your margin account. The longer you keep the position open, the more interest you’ll owe.

The Risks and Downsides of Shorting Tesla Stock Price: What You Should Know

While shorting Tesla can be a profitable venture for some, it’s vital to understand that it’s a risky strategy fraught with potential pitfalls. Here are some of the primary risks and downsides you should be aware of:

Unlimited Loss Potential

When you buy a stock, the most you can lose is the amount you invested. However, when you short a stock like Tesla, your losses can theoretically be unlimited. If Tesla’s share price rises instead of falls, the cost to buy back the shares and cover your position can be significantly higher than your original selling price.

Margin Calls

If the Tesla stock increases rather than decreases, your broker might issue a margin call. This means you would have to deposit additional funds into your margin account to maintain the short position. Failing to meet the margin call would result in your broker forcibly closing your position, potentially at a significant loss.

Interest Expenses

Holding a short position open over an extended period can be costly due to interest charged on the securities and exchange commission on the borrowed shares. This cost can eat into your profits or exacerbate your losses.

Regulatory Risks

Regulatory bodies like the SEC have rules in place for shorting, such as the “uptick rule,” which only allows you to initiate a short sale at a price higher than the last traded price of the stock. Violating such rules could result in penalties.

Company-Specific Risks

Tesla is a highly volatile and closely-watched stock. Unexpected good news or positive earnings reports can result in sharp increases in Tesla’s stock price, hurting short sellers. Additionally, Tesla’s CEO, Elon Musk, has been known to be outspoken, and his comments can significantly move the Tesla stock.

FAQs

Shorting Tesla stock involves borrowing shares of Tesla from a brokerage and selling them in the open market. The goal is to buy them back at a lower price when the stock price falls, thereby profiting from the decline.

Bearish investors may have various reasons for believing that stock price drops Tesla’s stock will decline. This is in contrast to bullish investors, who believe that the stock price will rise. Shorting stocks like Tesla can be a way to profit when the stock drops.

In most trading strategies in the stock market, investors borrow stock from a brokerage, with the agreement to return the stock at a later date. The investors then sell the stock at its current price, hoping to buy it back at a lower price to make a profit.

  1. Traditional Shorting: Borrow Tesla stocks and sell them, waiting for the stock’s price to drop.
  2. Put Options: Purchase put options that have the same underlying expiration date. This is a bearish trade strategy that profits when the underlying stock falls.
  3. Credit Call Spreads: An investor can use a more aggressive bear call strategy like a credit call spread, which involves selling a lower strike price call and buying a higher strike price call. Spreads establish a net cost and limit both the risk and profit potential.

To safely short Tesla stock, consider the following:

  • Hedge with Long Positions: Having some long market positions can balance the risk.
  • Use Stop Orders: Setting a stop order can protect you from massive losses.
  • Understand the Risks: Tesla is a volatile stock with a high market capitalization; make sure you understand the risk before engaging in shorting.

A bullish investor believes that Tesla’s stock will rise and may look to buy Tesla stock, whereas a bearish investor believes that the stock price will fall and may look to short the stock.

The maximum profit is the net premium paid when establishing the credit call spread. Maximum loss is calculated as the difference between the higher and lower strike prices, minus the net premium paid spreads establish net cost.

Short sellers are taking a significant risk. If Tesla’s stock price rises, the losses are potentially unlimited. In a bull market, this could be particularly dangerous. Also, the borrowed shares must be returned, regardless of the stock’s current price.

A covered call strategy typically involves owning the underlying stock and selling a call option. It’s not directly applicable to shorting, which involves selling borrowed shares.

Tesla’s market capitalization is an indication of the company’s value as determined by the stock market. High market cap stocks like Tesla can be more challenging to short due to their stability and innovative investment solutions.

Absolutely. The stock market is a place where bearish and bullish investors both operate, with many investors are using their respective strategies to capitalize on share prices moving up or down.

If the underlying stock rises, the bearish investor who has shorted Tesla may incur significant losses. It’s essential to have risk management strategies in place, such as stop-loss orders.

The stock’s entry price is the price at which you borrow and sell the stock. An advantageous stock entry price improves the profit potential in the trade.

Before deciding to short Tesla stock, consider the company’s financials, any upcoming news or events that could drive the stock price, and have a risk management strategy in place.

Disclaimer: Shorting stocks is risky and not suitable for all investors. This FAQ is for informational purposes only and should not be considered financial advice. Consult a financial advisor before making investment decisions.

 

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  Author Thomas Drury Seasoned finance professional with 10+ years' experience. Chartered status holder. Proficient in CFDs, ISAs, and crypto investing. Passionate about helping others achieve financial goals.

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