Short selling is a process by which investors can profit from the decline in a company's share price. It involves borrowing the stock from a stockholder, selling it and then repurchasing it on-market at a later time at a (hopefully) lower price to return the stock to the lender. The short seller profits in this scenario due to the sale price being higher than the buy price.
A retail investor can short sell a stock without actually purchasing the underlying shares. This is done through contracts for difference or CFDs. Unlike traditional trading, modern short selling with CFDs allows traders to trade the price movements without owning the shares.
Profits and losses are determined by the difference between the price when the “entering” and the “exiting” of the contract happened. It is important to remember that CFDs typically operate with leverage and that you may lose more than your original investment. You can learn more about CFDs by clicking here.
The table below shows stocks that have a high percentage of their outstanding stock sold short. Often, stocks which attract a lot of short selling activity have some fundamental issues to be solved but in some cases can present an investing opportunity. The stock probably should not be touched when there are issues; however, careful analysis of some highly shorted stocks can reveal that the short sellers actually have it wrong (or perhaps have overdone the selling) and therefore the trade could present an opportunity. Alternatively, an investor could try jumping on the bandwagon and shorting a stock that may have fundamental issues, although the investor needs to understand the risks associated with short selling.
A short seller will lose money if the stock rallies following the short sale. The potential losses from a short sale are unlimited since there is no limit to how high the price can rise. This is the main reason that short selling is risky, but there are also other risks associated with the practice. Once these risks have been identified and managed, short-selling can provide significant diversification to an otherwise long-only portfolio due to the ability to profit from declining stocks.
