| Answer:
Dear
BuyandHolder,
An
excellent and very timely question.
Selling
Short: A Definition
First,
for those who may not know, selling short is a way
to profit from a stock's decline in price. It is the
exact opposite of buying long -- buying in anticipation
of selling at a higher price in the future -- which
is much more common.
When
you short a stock, your broker "borrows" shares of
the stock for you from the account of another investor
or an internal pool and sells them. You are obligated
to replace those shares in the future, although there
is no specific deadline.
You
obviously hope to replace them by buying them back
at a lower price than you sold them for. The difference,
minus the broker's commission, is your profit.
For
example, you sell Stock X short at $60/share. It falls
to $40. You buy it back at $40 and replace the "borrowed"
shares. You pocket the difference of $20/share, minus
commissions.
Risky
Business
If
you sell a stock short and it then goes up in price,
you still must replace the shares you borrowed --
only you'll be doing so at a higher price. Using the
above example, you short Stock X at $60. It goes up
to $80. You buy it back, covering your short. You're
out $20/share plus commissions.
Picking
Stocks to Short
The
good short sellers do their homework. They do not
pick stocks to short at random but rather select those
they think will drop in price. They may note a continuing
(or sharp) downward trend in earnings. They may think
the company is in trouble. Or, they may think the
stock is simply overpriced.
Tracking
Short Sales of Individual Stocks
The
easiest and fastest way to get the short interest
on individual stocks traded on the NYSE, AMEX or Nasdaq
is online at www.nasdaq.com.
On the home page, type in the stock's symbol in the
quote box and the click on "InfoQuotes," the middle
option. Next click on "Fundamentals," the second choice
from the left. Then click on the link to "short interest."
Short
interest is the total number of shares of a stock
that have been sold short and that have not been bought
back or "covered."
In
addition to finding this number, you'll find three
other key figures on the Nasdaq short interest page.
- You
can check to see if short interest for the stock
has been up or down over a 12 month period.
- You'll
find the stock's average daily trading volume.
- You'll
find the number of days, given the stock's average
trading volume, it would take short sellers to cover
their positions -- that is buy back the stock --
if the stock had a marked rise in price.
This
third point can involve what is known as a short
squeeze. That's when a rapid price rise forces
investors holding short positions to buy back the
stock in order to cut their losses. This in turn drives
the price up further, thus squeezing out other short
traders and substantially increasing their losses.
$TIP:
For a list of the Top Twenty Stocks shorted on Nasdaq
and the AMEX, log on to: www.allstocks.com/markets/1short.htm.
An
Investor's Tool?
Short
interest is one theoretical way to judge the amount
of investor negativism or skepticism there is about
a particular stock. Those who use it as an investing
tool believe that an increase in a stock's short interest
means the short sellers are betting that the stock
will fall in price.
Obviously
use short interest with caution. It should never be
the sole way to evaluate a stock. If you own a stock,
which is being heavily shorted, read what analysts
are saying about it. Get the company's latest quarterly
report -- usually available on the company's website.
And, check the most recent report in Value Line
Investment Survey. Short sellers can be wrong.
As an old Wall Street saying goes:
"He
who sells what isn't his'n
Must buy it back or go to prison."
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