Short selling a stock is to buy it through a borrowing process from your stock broker. You borrow the shares and return them back once you’ve sold them. But there’s a catch, it doesn’t matter whether you make profits or not, you’ll still have to offload your position to pay back your broker.
The notion of short selling is that you buy your shares with the expectation that the price is going to lowers down. That’s totally the opposite of the traditional way of trading.
Penny stock short selling is a great technique to win big as the stock you own is being plummeted in price or value. Nonetheless, it’s not something you should get yourself involved into without a clear understanding.
What should you look for in a stock you want to short?
Make sure the stock is overbought: Being overbought means that the share’s price of a stock has become so high that it isn’t justifiable by any fundamental analysis.
In fact, it usually happens in a very short time due to a significant increase in demand. As a result, a pullback is usually followed which is what you would expect when you short stocks as such. So, in essence, the pullback will be in your advantage in this case.
Check the industry as a whole: We often think that once we spend a good amount of time researching a specific stock we can move on and buy some shares as long as it looks good to us.
We fail to realize that the entire industry can give us a wider picture to look at, which could potentially make our decision much wiser.
When you’re looking to short stocks, don’t limit yourself to just a few numbers of analysis. Shorting is far more dangerous than going long although many penny stock traders prefer to trade this way.
Be sure that the stock you’re shorting has begun its downtrend phase: One mistake being made by so many inexperienced investors is buying shares from a stock way before a trending change. If the method you’re using is strong, and you’ve been successfully using it for awhile, then it shouldn’t be a problem for you.
But if you aren’t sure as of how accurate your strategy is, then your best bet would be to wait for your entry signal first.
Be sure the liquidity is there: Liquidity is the degree to which a stock can be bought and sold very rapidly without any problem at the desired price.
However, for something like this to happen there should be some investors who are willing to buy while sellers are trying to sell.
What are the dangers of shorting stocks?
Shorting stocks comes with its package of unsafe sides. In order to be sure that you aren’t setting yourself up for failure, you also have to be very careful.
And you do have to know what you’re putting yourself into and how to manage being involved.
There is a chance for unlimited loss: Remember when you short stocks you’re making profits while the price is going down. Contrary to that, you’re losing as the price is going up.
So, if you’re lucky and your trade goes in your favor you’d be making profits until the price hits rock bottom, $0.00. That’s the limit since it can’t go any lower than that.
Unfortunately, if you’re losing there isn’t a limit to that. Your loss risk is very large in that sense which makes short selling very, very dangerous.
Risks of short squeeze: Investopedia refers to it as “A situation in which a heavily shorted stock or commodity moves sharply higher, forcing more short sellers to close out their short positions and adding to the upward pressure on the stock. A short squeeze implies that short sellers are being squeezed out of their short positions, usually at a loss.”
Short a pump at a wrong time: Many stock investors are making millions from penny stock shorting, but they aren’t the average type of investors. They have been in the game for quite awhile, which gives them the knowledge needed for such a risky way of investing.
If you’re new to this I would not encourage you to use this method. I don’t even have to repeat myself here because you already know the consequences.
Investing your money in penny stocks is a very dangerous idea. However, many people are doing just that and they’re doing very well in term of profits.
When it comes to shorting stocks, it gets even more dangerous. It may look easier to win shorting penny stocks than going long, but you can’t ignore the risks.
If you’re going to use this method, be sure you clearly understand what you can and can’t do. Without knowing and understanding them it’d be better for you if you don’t trade at all.
photo credit: yourtradingmentor.com.au