Selling short has always been an activity conducted by seasoned retail investors or powerful institutional ones. Common traders do not like to take such huge risks. However, there are many who are curious to know about its procedure. Let us learn about the basic concept of short selling.
About Short Selling
In a short sale, the stock trading is done by selling the shares even when we do not own them and buying them again at lower prices, thus earning decent gains. Hence, for a short trade to succeed, it is imperative that the price of a stock goes down after we sell the shares. So, we conclude that short selling is done in a falling or bear market. Short selling requires you to track the markets constantly and conduct good research in order to succeed. Here are few tips which will help you to identify the stocks that can be used for short selling.
Identify the Weak Stocks
As discussed above, short selling is done only for weak stocks. So, your first job is to identify them. Look out for stocks which are experiencing selling pressure from investors and try to analyze the reasons for their falling prices.
Study the Charts Carefully
If a stock's price falls in a particular trading session, then it does not mean that it is depicting a downward trend. This small decline can be because of a profit booking which has occurred from large institutional players. Studying its intraday, weekly, monthly and yearly chart patterns is a must before taking a decision to go short. This will tell us about its overall trend.
Try to Predict the Financial Results
A stock's price can rise consistently only if the financial results are good. In case you think that the results of a particular company would not be up to the market expectations, then going short can be a good strategy. But how will you decide whether the results will be good or bad? This requires study of earlier financial results, balance sheet and the company's debt.
Bad News can be Good News
Bad news about companies which reflect poor management decisions or losses can hammer down the stock prices. Hence, short selling in counters that generate a lot of negative news, is a strategy used by many traders.
Keep an Eye on Stocks Showing Huge Rallies
Whenever a stock shows a huge run up without any prominent reason other than buying interest, there are chances of it crashing down in the near future. Note if the fundamentals and business model of the company are strong enough. This can justify such a huge rise in its price in such a small time. Whenever you feel that a stock is very expensive for valuation, then it can become a good candidate for short selling at the right time.
The above mentioned techniques will be helpful for you to learn about recognizing the stocks which you can short. If you are a medium or low risk investor, then this is certainly not the area of operation for you. If you are not good at short selling, then delivery based buying is a good and reliable option. Good luck and do well!
Disclaimer: This article is just for reference purposes and does not recommend any stock market transactions.