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.
ASX Most Shorted Stocks
| Stock code | Stock name | Current price | Short interest ratio | Short interest percent |
|---|---|---|---|---|
| PLS | Pilbara Minerals Limited | $3.80 | 28.95 | 22.4% |
| IEL | IDP Education Limited | $15.92 | 17.62 | 18.51% |
| BLD | Boral Limited | $5.72 | 34.79 | 17.24% |
| LTR | Liontown Resources Limited | $1.12 | 29.03 | 16.6% |
| FLT | Flight Centre Travel Group Limited | $20.99 | 34.33 | 12.97% |
| STX | Strike Energy Limited | $0.20 | 37.74 | 8.12% |
| HVN | Harvey Norman Holdings Limited | $4.49 | 26.82 | 8.1% |
| DHG | Domain Holdings Australia Limited | $2.94 | 39.23 | 7.93% |
| LYC | Lynas Rare Earths Limited | $6.19 | 8.96 | 7.74% |
| MIN | Mineral Resources Limited | $70.20 | 15.61 | 7.59% |
Short Interest Ratio – the short interest ratio is the ratio of the dollar value of short interest outstanding divided by the average daily trading volume over the previous 30 days. This figure gives a rough measure of how many days it would take all short sellers to buy back their stock. A larger number implies that the stock is more heavily sold short.
Short Interest Percent – the short interest per cent is the percentage of the total stock outstanding that is sold short. It is another way to gauge how heavily short-sold a stock is.
Short Squeeze
Sometimes companies with a large percentage of stock sold short can be subject to what is called a short squeeze. This occurs when the stock price rallies and forces short sellers to buy back stock to close out their position – remember that a short seller sells the stock first and must subsequently buy it back to close the position. As more short sellers buy, the price rises further due to the buying activity and the increased price forces even more short sellers to buy back stock. Short squeezes can push the price rapidly upwards and can theoretically present an opportunity for a long investor to profit. Short squeezes are very difficult to predict, but stocks with a large percentage of their outstanding float sold short are an excellent place to start.
The information in this table should not be taken as a recommendation to either buy or sell these stocks but instead should provide the basis for further investigation into this information. Short sellers can sometimes correctly predict a stock’s demise, but they can also get it wrong and lose a lot of money when the stock rallies. Additional analysis is required to find out whether a stock with a large percentage of stock sold short is a good buy or sell candidate.
