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What are some of the things that make short sellers want to short a stock?
- NCLv 71 decade agoFavorite Answer
There are plenty of approaches, and none works perfectly. You should do your own backtesting before you commit to any short-selling strategy.
Some short sellers loook for companies that are suing short sellers in general and hedge funds in particular (typically, those are companies that have problems which they are not willing to discuss, so they sue short sellers to convince their shareholders that they don't have problems). Others may look for stocks that have substantially increased in price during the last three years and now have unusually large trading volume. Yet others may look for stocks that have already lost some value in the last 3-6 months and continue to trade at a high volume. Those are strategies that have relatively long (months) expected holding periods.
There are also various short-term strategies. For example, some short-sellers look for stocks that have shot up during last week on unusually low volumes. The expected holding period for this strategy is about a week.
And then, of course, there are all kinds of technical strategies...
- NightriderLv 71 decade ago
They look for stocks that has run itself ahead of the going price. It is poised for a fall. How do you determine that? Look for profitability. If the stock price is unjustified you should look at it for short selling. The price and profit must be in line with their industry. If it is overvalued, there is an opportunity to make money there.
But, be careful. The risks are great. You have to cover with additional money if the stock goes up. It is infinite. Understand this well.
If you are into this in any big way, look at options - there are naked options, covered options etc.. that will minimize risks but the rewards can be medium. You won't make a "killing", but your money is safely growing with minimal risk. (at least not high as short selling).
- 4XTraderLv 51 decade ago
Investors will short a stock if they feel it's going to fall in value. There can be any number of reasons why they believe it will fall, but the basic belief is that the price will drop.
- insuranceguytxLv 51 decade ago
Soem short sellers look for stocks that have 'run up' recently. Other short sellers look for 'bad management' however they define that.
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- AdiosLv 51 decade ago
They feel that the stock is overvalued and the market will recognize it and the price will come down.