Short Selling to Minimise Sector Risk

Today I came across a great snippet of information about short selling while following a thread about the subject over at the Fool. The thread was of particular interest as one of my shares, ACE (which hasn’t done too well so far), is currently being subjected to a large amount of shorting.

Shorting, or Selling Short, refers to the practice of borrowing a stock from someone and selling it with the intention of buying it back later at a cheaper price. This allows the investor to make money in a falling market.

One very interesting snippet from Manzanilla in the shorting thread I’ve mentioned above was that shorting can be a vital tool to minimise risk. I had not considered this before, but it seems a great idea:

And shorting is a vital part of pairs trading. You are convinced for some reason that Sainsburys will outperform Tescos, but are worried that the whole sector will fall - shorting Tescos and buying Sainsburys removes the sector risk.

I currently don’t intend to short, though at some point in the future I may. Manzanilla’s idea above seems to be something I may consider trying if an appropriate opportunity were to arise.