Selling short is not for beginners or the faint of heart. When you sell short, you are betting that a stock's price is going to decline. Instead of purchasing shares at the current price, you contact your broker and borrow the shares you want to sell. You offer them for sell at the current price, just as if you owned them outright. On a date stated by contract, you purchase shares at what you hope will be a lower price to pay back the broker. If you guess correctly, you make a profit. If the stock's price actually increases, however, you must pay the higher price to purchase the shares you need to return to the broker, resulting in a financial loss. Despite the risks, some investors actively seek potential short sells by determining the number of shares shorted for a company.
Finding Data on Broker Website
Most online trading sites have a section where you may research a stock's performance. Along with information on the company's financial position and profitability, you may find information on shares shorted. On some sites, you will find the data under the tab marked short interest. Typical information includes the number of shares shorted for the current and prior months, along with the ratio of shares shorted to shares traded. You normally may access the information even if you do not have an account with the broker.
Finding Data on Stock Exchange Website
Online exchange sites such as the one maintained by the Nasdaq offer detailed information on short interest. You will need to know the trading symbol for a particular stock or use the search tool on the website to locate the company profile, which contains the statistics on short sales. Information typically includes the gross and net number of shares sold short, the previous 12 months' average shares traded daily and the days to cover. The days to cover is the total number of shorted sales for the month divided by the daily average volume between settlement dates for shorted shares.
Requirements to Sell Short
To sell short, you must establish a margin account with a brokerage firm. Each broker sets the limits on maintenance requirements. You generally must keep at least 25 percent of the short sale value in your account. If the price for your borrowed shares increases, you will probably need to increase the amount of money in your account. Your broker might make a margin call, and if you are unable to meet it, your broker may sell some of your holdings to bring your account back to the minimum level required.
When to Sell Short
Investors typically realize the greatest profits from short sales when the market is either stagnant or in decline. Stocks that appear genuinely overvalued may fall sharply in the future, making them potential candidates for short sales. Alternatively, the entire market may appear nervous, indicating a possible downturn. Individual companies may release balance sheets reflecting a high current debt ratio that will require them to issue new stock, diluting the value of current stock, or face a potential cash flow problem. The company might also show reduced profit margins.
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