Short seller skill, sophistication, knowledge and experience supports investing and trading know-how beyond the ability of most investors. Experienced short sellers combine timing, judgement and facts in effective strategies that using their broad market vision and awareness to profitably short trade.
What you learn:
You learn about the specialized short seller skill, sophistication, knowledge and experience critical for success as a short seller. Successful short sellers develop and use skill, knowledge, and experience in the complex hands-on short selling process. While anyone can learn to sell short, beginners are urged to exercise caution.
FAQ about short seller skill, sophistication, knowledge and experience investors ask
What is a short seller?
Short sellers profit by selling overvalued stock they do not own!
First, they search to find an overvalued stock with business problems.
Then, they borrow and sell that stock from a stockbroker's inventory!
Next, they campaign to get more sellers to drive down the price.
Finally, after the price drops, they buy to repay the stock and all costs and keep the difference as their profit!
Short selling is more intricate and challenging than straightforward buying long to profit from price increases. However, investors who understand short selling basics better understand markets and investing.
What are short seller skills?
Selling short is a demanding advanced strategy that needs skill and experience. Besides knowledge and sophistication, skilled short sellers have extensive trading experience. While short selling is a simple concept, consistently doing it well is challenging. Setting up a successful short sale means identifying a good short target, getting the multiple essential short selling facts in alignment, as well as good timing for both the trade in and out. That is a lot, but there is more! Skilled short-sellers are also good dynamic managers that cope with market changes when multiple things happen or go wrong. And when something does go wrong, reacting well and managing surprises takes knowledge, skill, and sometimes luck! Even experienced investors use short selling strategies with caution.
How do you become a short seller?
Successful short sellers need more than just skill, sophistication, knowledge, and experience. They need an excellent relationship with their broker. They need that relationship because borrowing stock from the broker’s inventory is central to the short selling process. And they need to borrow from someone who will not call the loan and force them to cover at the first sign of trouble because market upsets or surprise changes in direction do happen. Although simple in concept, short selling that consistently makes money is a major challenge and rare achievement. Few do it well. Any beginner must first establish a record of trading success that shows they have the skills, sophistication, and needed knowledge.
How does short selling work?
Short-selling is a simple idea with many challenges for traders to execute well continually.
The short-sale targets are companies with significantly overvalued shares and multiple problems. The best targets involve fraud, weak finances, management blunders, underperforming operations, or an obsolete business model.
Short sellers must,
1. Research to find and understand the target.
2. Borrow shares from the inventory pool of a stockbroker.
3. Sell high.
4. Campaign to drive share prices down.
5. Cover at low prices.
6. Pay costs and return borrowed shares.
7. Pocket the difference as profit.
Beginning investors should avoid the many challenges of this complex short-selling strategy, which requires the excellent timing and execution skills of experienced stock traders.
Short seller use timing, judgment, vision and luck layered on the facts
Short selling is all about timing but it is much more than just good timing. Knowing the combination of facts, timing and good judgement needed to short stocks requires a deep understanding of how stock markets work.
Short sellers are hands-on strategic operators that know what they are doing and can still can get on the wrong side of trades. Luck helps but can never be counted on. Rather, short sellers need good research, good judgement, good timing and always, a bailout plan.
The best short sellers are reasoned thinkers that possess judgment, wisdom and experience. Effective short sellers must have a broad market vision and keen situation awareness. Market awareness comes from experience and broad vision means they see multiple perspectives that comes from possessing an open mind with a wide swath of practical knowledge. Few things or events surprise them, they react well to what happens.
Short sellers do excellent research and carefully examine and consider each influencing factor before making a decision. Only after considering the combined effects of all the factors do they make a decision. They are not impulsive. When they judge that the combined total of all factors favor shorting, they quietly take a position.
Things short sellers know
- Short sellers know market timing as well as the trigger and tipping points for a short play. Ideally they arrive just on time. But they need confidence a tipping point or trigger will soon happen. That means some event or information that will drop the stock value and start a downside run.
- Short plays are short term. Few short plays go beyond a few weeks or months. There are rare exceptions.
- Short selling works best in bear markets and can be a winning strategy in a bear market when short selling is easier but still not an easy strategy to execute well.
- Shorts do not want to be early as that can be a costly mistake.
- Short action is fast and furious, when compared to income investing.
- Short selling has high risks.
- Dividend costs can be very high.
- Some shorts never happen. Rules, brokers and thinly trades can all frustrate a possible short play.
- Stock markets are not logical. Sometimes a short squeeze happens when, logically, they should not. Shorts are always ready to bail.
Selling short…large scale sophistication
Short seller skill, sophistication, knowledge and experience is basic to short selling success. Knowing shorting basics helps new investors better understand how the stock market works. Don’t consider shorting a stock until you have considerable stock market knowledge and investing experience with a successful track record.
Educate yourself by building your base of knowledge and establish a successful investing record first. Then you can consider adding selling short skills to your investing toolkit.
The skills, business and stock market sophistication, knowledge and in-depth research required are a demanding combination. That puts short selling beyond the experience of normal investors or traders. While any investor can learn to sell short, only knowledgeable, experienced traders should do it.
Short selling requires skills, judgement, vision and timing to be effective and profitable. As well, short sellers must have a keen market awareness and a broad vision.
Sophistication of shorts
Experienced short sellers combine timing, judgement and facts into profitable trades.
Besides knowledge and experience, traders that regularly and successfully sell short tend to be confident, sophisticated investors. They do their homework and their own thinking. In total, with their excellent research skills, that adds up to short seller skill, sophistication, knowledge and research ability.
They are also thick skinned and indifferent to the howls of protest and name calling that come with selling short. Overtly and publicly selling short is an investment play against a specific company. At times such a bold move can attract lots of attention. Most of it is negative.
Sometimes the name calling includes suggestions that selling short is anti-capitalist. Short sellers scoff at that and see themselves as pro-market players that add trading liquidity. Anyone that does not agree with them, meets a ‘get over it’ indifference. Successful short sellers know the rules and accept the risks of being short.
The successful short, when played well, produces very significant profit in a relatively short time. Once a known short seller develops a track record and a following, they can become very formidable opponents.
Short targets need careful selection
Short traders seek stocks that can significantly fall in price. The short sale takes place once the short selling trader knows, believes or speculates that the fall in stock price will begin soon.
Short traders acquire or research information that makes them believe the price of the shares will fall. They know the many reasons that stock prices may fall. Facts or rumors can affect or influence the stock market, broader economy, a specific industry, or a specific company itself. Successful large shorts are based on fact although rumors alone can create short selling opportunities.
Successfully picking and executing a profitable short trade takes considerable knowledge and skill. This is no place for a beginner to dabble.
Short sellers know industry facts
When targeting a company or industry, short sellers do considerable research to develop a good understanding of the specific industry and company that is being targeted. At times when a short seller misreads or worse, misunderstands an industry, a short sale may produce nothing but painful losses. It happens to even the biggest players.
For example, resource industry stocks can be very risky shorts for new or uninformed investors. Each industry requires particular knowledge and information. Don’t play if you don’t know.
Short sellers know how markets respond
Most of the time markets react instantly to news. Short term corrections, gyrations and overreactions are a daily occurrence. As we have discussed before, in the short-term, markets react with a good measure of emotion. Once information gets digested and integrated into the collective knowledge of the market, volatility typically settles down.
Experience again serves short sellers well. Consider that each stock has personality. Some are steady and reliable some are vulnerable others are explosive. The short seller knows of this behavior in advance.
Each market and industry also display unique behavior and patterns. Again, the short seller knows and uses this behavior in their favor.
Volume plays a significant part of market behavior. Enough shares must trade to be successfully sold short. This means stocks that trade in small volumes, or that have limited investor interest, are poor candidates for shorting.
Larger companies attract more shorts
The requirement to borrow stock puts a practical low end limit on the size of a company to short. If you can’t borrow stock, you can’t sell short. So typically only the more widely traded, large companies attract short sells.
That does not apply universally. As long as you have a cooperating stockbroker, with an inventory of shares to loan, you can short. At times that can mean even a small or micro cap stock may make a good short.
However that is unusual. In fact the market rules prohibit penny stocks, those under $1.00, from being shorted. Additionally the stockbroker can actively discourage shorting by refusing to loan the required stock.
So practically speaking, only medium and larger sized companies get shorted. In addition, the short target must also trade a certain volume of shares. Thinly, infrequently traded or shares of companies that only trade in low volumes do not make good shorts.
In such cases there are not enough buyers for a short seller to establish a significant position. In such cases, that low volume effectively protects the company from any significant short selling.
Short sellers know timing is critical
All the facts and good judgement are not enough. Even when right about the market, company and industry, timing the short has to be right. Remember, there are running costs of selling short. The short position depends on finding and borrowing stock. That takes fee payments and possibly dividend payments. Short selling also exposes the trader to the risks of being forced off the position.
The short seller times their sale as close to a change in market awareness as possible. This can get complicated. But think of the ideal as selling short today just before the bad news comes out tomorrow. There is room for many games, both legal and illegal to be played around timing a short.
That is dangerous territory for the beginner or those not in the ‘know’. Just stay away. Sheep get sheared in such situations. Don’t be a sheep.
Short selling is effective and profitable when done well but think of it as effective but risky. I say risky because, compared to going long, there are so many more things that can go wrong or go against the short seller.
Question Answered!
What are short seller sills gets answered when we understand they have a broad range of skills in this hands-on, timing based strategy. Knowing the timing, judgement and facts must combine for a successful short sale helps us understanding this strategy requires knowledge and experience.
Lesson takeaways, Short seller skill, sophistication, knowledge and experience:
Short seller skill, sophistication, knowledge and experience supports investing and trading know-how beyond the ability of most investors. Experienced short sellers combine timing, judgement and facts in effective strategies that using their broad market vision and awareness to profitably short trade.
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Lesson links to:
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 9: Short seller cost control
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