9 Short seller facts align before short sellers target a company. Experienced, knowledgeable short sellers know when stock market and company facts favor a short play. That includes market, company and sector facts as well as the timing, costs, price and rules that must be played with the right short strategy. Short selling is complicated. It is a strategy for experienced, knowledgeable players.
What are the keys to short selling?
Short Story Shorting Stocks course, Lesson 4, answers the question, what are the keys to short selling? At the end of the lesson, links to related content help you learn more.
What you learn:
The keys to short selling are an alignment of nine facts. Learn how the market, company and sector facts must be in time with the costs and price, meet the rules with the right strategy. When the short stars align, experienced short sellers move on selected target companies.
Short sellers need more
than knowledge and timing
Successful established short sellers have a process and the discipline to research, find and prepare their short selling attack. They sell short only after being convinced that the odds have lined up in their favor by considering a diverse number of factors.
9 Major short selling factors:
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market facts
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company facts
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sector facts
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market response
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timing
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costs
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stock price
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short rules
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short strategies
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Experienced short sellers bring a wide field of vision and experience to the market. They carefully research, examine and consider each influencing factor and look at the combined effects of all factors before acting. Only after the odds have lined up in their favor, will they take action and sell a stock short. They do not act in anticipation but only based on facts they believe to be true.
Two major short selling factors:
The 9 factors must all align of a great short but most important among the factors are the market and company facts.
1. Market facts used by short sellers
The market itself and the overall investment climate play a role in any shorting strategy. In strongly running bull markets, profitable shorts are less common. Shorts generally work best in weak or falling markets.
Eventually every down-trending market reaches the bottom. At market bottoms, when most investors have negative feelings, shorting can be both difficult and dangerous. So, when the bottom has been reached the only way is up. That means the time to short has passed making selling short at market bottoms a form of financial suicide.
Short sellers are cautious in bull markets
In strongly rising bull markets shorting can be very challenging. Even when the stock of a company trades at incredibly high prices, betting that it will soon fall can be very risky. Being wrong gets very expensive.
The market can assign insanely high valuations for a very long time. There are numerous examples of companies that are not making money or with little or no revenue, that trade at high stock market values.
Reality does eventually catch up with every stock. However, that can take a very long time. Mis-timing when those values will correct to a rational level has hurt numerous short sellers.
Shorting the stock of such companies can seem very logical. However, the market is not logical, it is the market. Shorting, especially in a strongly running bull market, can be a very costly mistake.
There are examples of short sales working very well in virtually any market. However, the market factor generally keeps short sellers quietest in both deeply depressed and very strong bull market runs.
2. Company facts short sellers need:
By far, the most important factor for short sellers is knowing the business fundamentals of the target company itself. Getting negative information before it is priced into the market can ensure a good short.
That can be as close to a sure thing as any short seller can get. Without a doubt, even in the most unfavorable market conditions, a very profitable short sale can happen when the fundamentals are negative.
Knowing, surmising or suspecting that a company will soon have to release very bad information can be a very good opportunity to sell short. Get the fundamentals right and even a strong bull market will not protect a company with very bad results.
Good news for the short seller is bad news for the company. That news usually comes in the form of poor operating results, reports of management misbehavior or a negative market outlook.
When the short seller has facts or belief that compel the conclusion that the shares are significantly overvalued, the short selling begins. This is done quietly so buyers are not spooked. After all they need someone to buy the overvalued shares that they have borrowed.
Simply taking the short position does not guarantee the short seller a profit. To profit, the short seller must be right as well as get the desired and timely negative market reaction to the bad news. Get the timing wrong and “right” can end up being much poorer if the market does not agree with the short evaluation.
In most cases, short sellers expect the market to react negatively as soon as the bad news or revealed information, gets released. Should the anticipated poor information materialize, a significant price drop can happen in minutes, hours or days.
However, that does not always happen. Short sellers can tear their hair out in frustration when the anticipated reaction does not happen. At times the market can seem to shrug and carry on. As noted above, the market is not rational. It is simply the market; the result of collective human behavior that is often not rational or logical.
Timing and aligning other factors
When the market and factors of a potential short target company align, short sellers begin paying close attention. Of the other seven factors, the sector facts often fall in line with the company and market moves, leaving the next three other closely tied factors. These related three, timing, costs and price, often favorably align as the market makes favorable moves.
The next important factor, compliance with the rules is a given in all short plays. That leaves the choice of strategy as the last decision that must fall in place. While there are countless different strategies, most short sales are plays on either, a downtrend pullback, a trading range movement or on a stock in an active decline.
Timing and risks challenge shorts
No matter what strategy is used in any market, short selling presents the seller with a continuous management challenge. Timing and risk management are locked at the top of that list. The successful management of timing and risks presents challenges in any short selling play.
Question Answered!
Answering the question, what are the keys to short selling? Knowing that the 9 keys to short selling must align, helps investors learn how the market, company and sector facts align in time with the costs and price, meet the rules, and play an appropriate strategy. When the short stars align, experienced short sellers can successfully move on a targeted companies.
Key takeaways,
9 Short seller facts align:
9 Short seller facts align before short sellers target a company. Experienced, knowledgeable short sellers know when stock market and company facts favor a short play. That includes market, company and sector facts as well as the timing, costs, price and rules that must be played with the right short strategy. Short selling is complicated. It is a strategy for experienced, knowledgeable players.
- Shorts align with the stock market facts and trends.
- The company facts and figures must align for short interest.
- Each industry has facts that must align to increase short interest.
- Stock market action influences the timing of short selling action.
- Short sellers are strict cost managers.
- The stock price of target companies must align with the short interest.
- Regulators, stock markets and brokers impose short selling rules.
- Short sellers can use a number of techniques and strategies.
- Most important short selling factors are market and company facts.
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Short story shorting stocks:
Short selling stock explained Lesson 1
Short selling improves markets Lesson 2
Short selling improves companies Lesson 3
9 Short seller facts align Lesson 4
Making money selling short Lesson 5
Shorting stocks has risks Lesson 6
Who’s selling your stock? Lesson 7
Short seller skill sophistication knowledge Lesson 8
Short seller cost control Lesson 9
Short selling has rules Lesson 10
Next lesson 5:
Making money selling short
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