Home
>
Stocks & Mutual Fund
>
Shorting Stocks ? The Basics, Part I of II

Shorting Stocks ? The Basics, Part I of II

What does it mean to short a stock?

This means that you borrow the stock from your broker to sell to a third party. The idea is to buy back the stock at a lower price, returning the shares to your broker while leaving the remaining cash in your account as a profit. Put another way, a short seller does not own the stock before they sell it. Instead, they borrow it from another investor who already owns it. At a later date, the short seller buys back the stock they shorted and returns the stock to close out the loan. If the stock has fallen in price since they sold short, they can buy the stock back for less than they received for selling it. The difference is your profit.

Short selling is a transaction made on margin. This means that you must open a margin account to sell short. Most online brokers allow you to open a margin account if you qualify according to their rules and regulations. Criteria related to minimum balances and cash reserves may apply. You will sign an agreement with your broker to open a margin account, this agreement says that you will maintain a cash margin or pledge your stocks as margin. (Note: Call your individual brokers for additional questions that you may have).

Shorting can be difficult even during a bear market. The conditions must be exactly right for a stock to be considered a short. Just because a stock looks overvalued or high doesn't mean that it is time to sell this stock short. As I have said before, what looks high to one investor may still be low to another. Two things to take into consideration would be dividends and thinly traded stocks. A stock paying a dividend must be paid by you the short seller when this position is on. Low volume stocks can be very volatile and market makers and money managers can run up the price quickly crushing your short play and adding to your overall loss.

If the stock rises above your sell price, eventually you will have to cover your short for a loss. If you have not placed a stop loss, the stock can continue to go higher as your portfolio heads for disaster. Theoretically, a stock can rise infinitely, meaning your losses can rise infinitely. Imagine shorting NVR at $200 a share because you though it was overvalued, only to see it go to $700 per share. I am sure this type of trade would wipe out or leave a big dent in anyone's portfolio.

Many great shorting opportunities come from the same small and mid cap stocks that were once high flyers in previous months or years. For example, TZOO and DCAI were high flyers in 2004 before they became red flags and shorting opportunities. Even large cap companies such as eBay, SBUX and HD can present shorting opportunities at certain points.

Ideal shorting candidates will have built several bases over a long period of time resulting in faulty late stage bases as the stock starts to fall. We look towards stocks that have built four or more bases over a few years although this is not always necessary. Stocks such as the mortgage lenders (LEND & CFC) have built many bases since 2002 and have run up several hundred percent. Home builders also fall under this category but have not made our shorting lists as of yet. They have been showing some red flags but support has been noted at or slightly above the 50-d moving averages.

Additional criteria for shorting candidates will be decelerating earnings and sales and a relative strength line heading down. Basically take the characteristics that we use for long positions and reverse the criteria to develop a list of possible short candidates. Even familiar chart patterns can be used to spot shorts; the reverse cup shaped base, the head and shoulders pattern and/or the flat base with a stock breaking out to the downside on above average volume. Industry groups that are becoming weak or are showing multiple stocks falling and breaking through key trend lines should be noted on a watch list. If one stocks looks like a short candidate, look for additional sister stocks that may have the same set-up. Remember, stocks usually move in groups whether they go up or down.

I tend to look for stocks that are below both the 50-d and 200-d moving averages. Once they slice through both of these lines, I then look for a strong down-trend and a failure to break above the 200-d moving average. This is my ideal time to short a particular stock.

Always have a sound exit plan in place with a predetermined stop loss to protect your capital. We typically use a 7-10% stop loss for our long positions depending on the market strength but I would advise a larger buffer for short candidates. A stop loss placed 10-12% from your sell point would be ideal as most stocks have a natural tendency to go up or contain volatility near the shorting sell point.

Shorting stocks can be more difficult to learn than buying stocks because a whole new set of rules and bearish short patterns must be learned, on top of your buying rules and chart pattern skills. Shorting can take many more years to master and can provide a shorter window of opportunity as bear markets typically don't last as long as bull markets do. No matter what strategy you develop with shorting or buying long, you must always stick to strict sell rules. Never argue with a position that goes against you, emotions and pride mean nothing in the market, especially in the short market. Sell all losers immediately before they devastate your portfolio and your confidence going forward.

The next article from this two part series will detail the strategies or reasons why you may want to short a stock and a few examples of how shorting stocks can benefit a portfolio during bear markets or sideway corrections, similar to our current situation.

Chris Perruna - http://www.marketstockwatch.com

Chris is the Founder and President of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We don't stop at just showing you our daily and weekly screens, we teach you how to make your own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.

tidy up service Glenview ..

In The News:

New Android malware BankBot YNRK silences phones, steals banking data and drains crypto wallets automatically. Learn how this advanced threat works.

FDA approves first human trial for Paradromics' brain-computer interface that could restore speech for paralyzed patients through neural technology.

New phishing platform QRR targets Microsoft 365 users across 1,000 domains in 90 countries. Learn how to spot fake login pages and protect your accounts.

OpenTable now uses AI to track your dining habits and share insights with restaurants. Learn what data they collect and how to protect your privacy.

Google's discontinued Nest thermostats still secretly upload home data to company servers despite losing smart features, raising serious privacy concerns.

New Android malware NGate steals NFC payment codes in real-time, allowing criminals to withdraw cash from ATMs without your card. Learn protection tips.

DoorDash confirms data breach exposing customer names, emails, addresses after social engineering attack. Learn how to protect yourself from scams.

Concerned about Google's AI scanning your Gmail? Learn how to disable Gemini features that access your emails, Drive files and Chat messages for privacy.

Google warns Android users about dangerous fake VPN apps hiding malware that steals passwords, banking details and personal data from phones and tablets.

Apple's digital passport feature lets iPhone users breeze through TSA checkpoints this holiday season using Digital ID technology at 250+ airports.

A new phishing scam targets family photos with fake "Cloud Storage Full" alerts. Criminals steal credit card information through fake sites. Learn protection tips.

South Korean scientists create ultra-thin fabric muscles that turn clothes into robotic assistants, lifting 33 pounds while weighing under half an ounce.

Archer Aviation has acquired Hawthorne Airport for $126M to launch an LA air taxi network ahead of the 2028 Olympics, featuring AI-powered eVTOL operations and next-gen aviation tech.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

Fake AI apps disguised as "ChatGPT" and "DALL·E" are flooding app stores with dangerous malware that steals data and monitors users without detection.

Fake buyers demand specific vehicle reports from unknown sites to steal credit card information from car sellers, but warning signs can help identify these scams before paying.

Android users can now manage apps across multiple devices more easily with Google Play Store's updated remote uninstall button in the latest update.

NASA's Perseverance rover discovers shiny metallic rock on Mars that could be a meteorite from an ancient asteroid, containing high levels of iron and nickel.

Holiday scams spike during Black Friday and Cyber Monday as criminals exploit your leaked personal data. Learn how to protect yourself from fake stores and phishing.

Commerce Department proposes TP-Link router ban over Chinese security risks. Learn how this potential prohibition could affect your home network and devices.

Hyundai AutoEver America suffered a data breach affecting 2,000 current and former employees, exposing names, Social Security numbers and driver's license information.

Washington court rules automated license plate reader images are public records, even when stored by vendors like Flock Safety, setting precedent for transparency.

Fake airline texts claiming flight cancellations are targeting travelers with convincing scams. Learn how cybercriminals steal personal data and credit card info.

Discover how iOS 26's new Adaptive Power feature automatically extends iPhone battery life by learning your usage patterns and adjusting performance intelligently.

New TikTok malware campaign tricks users into running PowerShell commands that download Aura Stealer, which steals credentials and authentication tokens.

Shorting Stocks ? The Basics, Part I of II

Stocks & Mutual Fund