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Yahoo BusinessJul 06, 2020
Tesla Demonstrates Why Short Selling Is So Much More Dangerous Than Going Long
Tesla Inc (NASDAQ: TSLA) shares ripped higher by another 10% on Monday as the Wall Street buying frenzy surrounding electric vehicle stocks continued. Earlier this month, Tesla reported its second-quarter vehicle deliveries were down about 5% from a year ago, yet Tesla's market cap has exploded from around $40 billion a year ago to $245 billion today.Tesla has the single largest short position of any U.S. stock, according to S3 Partners. And while short sellers pound the table on how detached the stock has come from reality, Tesla is a textbook example of how much more dangerous it is for traders to short a stock than go long.Risk-Reward Balance And FeesThe primary reason short selling is more dangerous than buying is potential risk versus potential reward.When an investor buys a stock, risk is capped at 100% of the investment. A stock price can't go lower than $0, and rarely does it even come close. At the same time, potential upside is unlimited, and stocks often gain 150% or even 200% in a matter of a few years. Tesla shares are up 468% in the past 12 months.When a trader shorts a stock, that risk-reward balance is reversed, creating a situation where potential gains are capped at 100% but potential losses are unlimited.On top of that elevated risk level, short sellers must also deal with borrowing fees. For most liquid stocks like Tesla, these fees are relatively small, but they eat into any potential profits and add to any losses.On top of borrow fees, short sellers are requ
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