Because of its aggressive e-commerce business approach, Amazon.com Inc. (AMZN) draws both believers and doubters. Profits have been sacrificed in order to gain market share. Although this is common for early-stage organizations, Amazon has continued along this route for more than 20 years. Amazon’s stock price has risen throughout the majority of its existence as it has attracted investors who share founder Jeff Bezos’ vision.
- Amazon’s business strategy continues to prioritize market share and revenue growth above profitability.
- Shorting the stock via a broker is the simplest approach for investors interested in taking advantage of a predicted decrease in Amazon’s stock price.
- The second alternative is to purchase put options on the stock.
- The main hazards of shorting stocks, including Amazon, are the borrowing costs and the possibility of endless losses.
If you don’t think Amazon can start turning its market dominance into profitability, there are many strategies to short the company. If investors lose trust in Amazon’s ability to continue gaining market share via new product releases, or that this market share will eventually transfer into profitability, the company’s price would undoubtedly plummet. Short-sellers may benefit handsomely from high-multiple momentum stocks that fail to match investors’ expectations.
The most straightforward approach to benefit from a drop in Amazon’s stock price is to sell it short via a broker. Using a broker to short a stock entails borrowing the stock and then selling it at market or with a limit order.
To conclude the deal, the stock must be purchased back at some time in the future. If the price of the stock rises after it is purchased back, the investor loses money on his short sale. If the stock price has declined, the short-seller benefits from the difference between the sell and buy prices.
Shorting a stock, on the other hand, entails significant risks. A borrowing fee is charged that grows over time. This cost is little for a liquid company like Amazon, but it might rise if there is a high desire to short the stock. Another danger of shorting a company is that the shorting mechanisms are stacked against the short seller.
The maximum an investor may lose on a stock in a long position is 100%. In principle, losses while shorting are limitless. If the stock falls to zero, a short seller may profit 100%. As a result, short-selling is only recommended for seasoned traders who understand the dangers involved.
Another danger of shorting a stock is the possibility of a short squeeze. Stocks with high valuations, such as Amazon, tend to attract short sellers, particularly when the stock price or business displays symptoms of weakness.
This presents its own risk since a bullish trigger might result in large profits. As shorts are obliged to cover to avoid losses or for risk management, the profits might become highly exaggerated. Of course, shorts covering increases demand, driving it even higher.
As a result, short sellers should have a strategy in place to deal with short squeezes and counter-trend rallies. Examining a stock’s short float, which may be discovered via a broker, is one technique that can be used to determine the likelihood of a short squeeze.
Buying puts is another way to benefit on a drop in the stock price. The benefit of purchasing puts is that the trader can only lose the amount he paid for the put option. Put options are contracts to sell a stock at a certain price and time. For example, in September 2022, someone may purchase a put option to sell 100 shares of Amazon for $3,500.
If Amazon’s stock price is higher than $3,500 on the option’s expiration date, the option is worthless. If the stock price ends up at $3,000, the option is worth $50,000. (500 x 100 shares).As opposed to shorting the company, put options clearly provide significant leverage for traders with great confidence and a capped downside. The disadvantage is that traders must be right about the stock’s direction and timing in order to benefit.
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