Shorting Is All the Rage for Retail Investors as Stocks Plunge

Retail investors, who helped push stocks to all-time highs, are now trying a different tactic: Betting against the market.

From January to August this year, even before the most recent slump in stocks, the number of newly opened short positions on trading platform eToro was 61% higher than in 2021 and 41% higher than in 2020. Meanwhile, some of the biggest US exchange-traded funds that bet against popular indices are raking in record amounts of cash.

It’s quite a change in tactics for retail traders. Enticed by the sharp equity rally and bolstered by stimulus checks during the pandemic, small-time investors flocked to open trading accounts and poured cash into stocks. Now, as many flee the slumping market, others are using short positions in an attempt to claw back some of the losses of the past several months.

Connor Furlan, a 29-year-old consultant in Chicago, had never shorted anything until this year, when he noticed how inflation and the war in Europe were rattling markets. Last year, all of his portfolio was in long positions. Now, he’s got about 50% in short positions — mostly through the ProShares Short S&P500 ETF (SH) and the Direxion Daily S&P 500 Bear 3X Shares ETF (SPXS) — combined with 25% cash in money-market funds and 25% in value-oriented equities.

“I have to be tactical now and protect myself,” he said. “There's no catalyst right now in my opinion. Everybody is scared.”

Taking a short position effectively means wagering that an asset will fall and is usually the purview of hedge funds and other big investors. For retail traders, there are a few ways to do this: Buying an inverse exchange-traded fund that gains in value when its underlying asset falls, purchasing a “put” position through an options broker or short-selling through margin trading.

It’s a risky strategy. Taking short positions can easily backfire if the asset rallies, a common occurrence in the stock market lately as wild swings rattle investors. Also, there’s often no limit to the potential downside short-sellers can face. But for those with a stomach for risk, the maneuvers can offer a sense of agency at a time when markets seem out of control.