Instruments used to take short positions

Taking a short position in a company typically involves betting that the company's stock price will decline. How do we do that? There are several financial instruments which can be used to take a short position:

• Sell Stocks Short: Shares are borrowed from a broker and sold in the market, with the expectation that the share price will decline. When the share price declines the shares are bought back at a lower price.

• Put Options: Purchase put options, which give you the right, but not the obligation, to sell the stock at a specific price (strike price) before the option expires. If the stock price falls, the value of the put option increases.

• Bearish Spread Strategies: Use options strategies like bear put spreads or bear call spreads, where you buy and sell options simultaneously to limit potential losses while still profiting from a decline in the stock price 

• Exchange-Traded Funds (ETFs): ETFs allow us to invest as a proxy on the entire market such as the SPY or a sector of the market. Inverse ETFs allow us to short the market or a sector. Inverse ETFs that are designed to move in the opposite direction of the underlying index or sector. For example, if you believe a sector containing the company will decline, you can buy an inverse ETF for that sector.

• Single Stock ETFs: These ETFs track the performance of a single individual stock, rather than a basket of stocks or an index. These were designed to provide investors with an alternative way to gain exposure to a specific company's stock. Stocks for which there are Single Stock ETFs available are Apple, Amazon, Google, Meta, Nvidia and Tesla, the list of Single Stock ETFs keeps growing and there are also inverse Single Stock ETFs for which can be bought to take a short position,

• Credit Default Swaps (CDS): These instruments came to the fore during the 2008 Financial Crisis. A CDS is a type of insurance to bet against the creditworthiness of a company/ country. If the company/country defaults on its debt, you receive a payout from the swap. These instruments are used mainly by institutional investors, although retail investors can indirectly invest in them via mutual funds or ETFs.

• Contracts for Difference (CFDs): Enter into a CFD contract where you agree to exchange the difference in the value of the company's stock from the time you open the position to when you close it. If the stock price falls, you profit from the difference. A point of note is that these instruments are not available in the US or to US citizens.

Each of these instruments has its own risk profile, costs, and requirements, so it's essential to understand them fully and consider consulting with a financial advisor to determine the most suitable strategy for your investment goals and risk tolerance.