Shorting Tesla Explained

Shorting Tesla Explained has been in hot water lately for claiming that Tesla’s stratospheric stock price is “being artificially inflated by short sellers.” In case you’re not familiar with the term, short selling is when an investor sells shares they don’t own, hoping the share will fall in value and they can buy back the shares at a lower cost.

The main reason investors short Tesla is because the company has a very high valuation when compared to its auto peers. In fact, some experts believe that Tesla trades like a tech company more than it does an auto maker.

Shorting Tesla Explained: What You Need to Know

But it’s important to note that while Tesla has a huge short interest, there are many other US stocks with larger short positions, including Alibaba ABLA +0.4% and Yahoo YHOO +0.2% (though some of that Yahoo short is actually hedges related to convertible arbitrage).

Investors short Tesla on the belief that the stock will decline. If that does happen, the short seller will be able to buy back the Tesla shares at a lower price and make a profit. In the past, rising short interest volumes have been a strong indicator of bearish sentiment in the market.

Investors looking to short Tesla can open a margin account at their broker, then borrow the actual shares from a third party to sell on the market. Or they can invest in an Exchange-Traded Product (ETP) that tracks the performance of Tesla’s underlying shares, such as the 3x Tesla Short ETP TSLA -0.14%.