If done properly there is a lot of money to be made by short selling stocks. Short selling is considered unethical by some investors as it is contrary to traditional investing. But it shares similar principles as done for long term investing.
Short selling means selling stocks which you currently do not own. This can be done if you are registered with your broker to do margin trading. Having certain balance in the trading account allows you to sell some shares which are not in your account. You will buy the shares after the shares have come down. It is similar to buying initially and selling later. To make profits we need to make sure that we buy at low price and sell at high price.
There are several reasons why a stock can fall. Knowing that and confirming the downtrend will help short a stock at appropriate time and make profit. The following paragraphs will let you know the different reasons for a stock?s fall.
When a stock is in down trend for quite some time, the long term investors will try to give support by buying at the 200 or 150 day moving average values. If that support is not observed and the stock falls below the 200 day moving average, then it is highly probable that the stock is in its long term downtrend and can go down further for quite some time.
Just before quarter results are announced there exits a chance to short sell a stock. When it is little bit clear that the company?s performance might not be as good as the previous quarter then many investors slowly start selling the stocks. After company announces the results, stock analysts will take some time to give their analysis. It is during this time that if the results are not better than previous quarter results, the short selling can be done. After analysts? announcement, depending upon positive or negative, one can decide to buy the stocks immediately or later.
At the year end many investors sell stocks which are in downtrend for quite some time to book losses. This will help them to get some tax rebate.
When insiders are selling stocks it could be due to their personal reasons. But many insiders start selling means that something is wrong with the company and we can short sell its stock.
If the company?s fundamentals are degrading day by day, it means that it will lose over long term. If the company is increasing inventory without increase in demand of its products, it is definitely going to face problems. It might sell its products at cheaper rates and this will lead to losses. If an industrial sector is fundamentally weak, then many stocks in that sector are going to be hit hard. Those companies which do not have a long term plan will lose more.
All these things can help find the appropriate time to short a stock. Always remember the basic principle of investing: buy low and sell high. No matter which is earlier.
