White Top View series Short Story on Short Selling, Part 5
Short sellers need judgement, vision and timing
Beside, judgement, vision and timing, effective short sellers must have a keen market awareness. Successful, experienced short sellers bring a wide field of vision to their market decisions.
Short sellers carefully examine and consider each influencing factor. Then consider the combined effects of all the factors. When they judge that the combined total of all factors favor shorting, they quietly take a position.
Our discussion today continues as Part 5 in the White Top View series Short Story on Short Selling. In Part 1, Novice investor asks, “Explain selling stock short”, we opened our discussion of selling short.
In Part 2, Investor, is a stranger selling your stock? we continued by explaining that short sellers must borrow stock. So they could be selling stock that you own!
Part 3, Investors must know the short story, covered the sophistication of short sellers and why they usually target large companies.
Part 4, Nine things investors selling short must know, introduced the 9 factors that need to be considered and also discussed the first two factors, Market facts and Corporate facts.
Today in Part 5, we continue with discussion of the next three factors, 3. Industry facts, 4. Market response and 5. Timing.
3. Industry facts
Understanding the specific industry of the company being targeted is important. At times when a short seller misreads or worse, misunderstands an industry, a short sale may produce nothing but painful losses.
For example, resource industry stocks can be very risky shorts for a new or uninformed investor. Each industry requires particular knowledge and information. Don’t play if you don’t know.
The White Top View blog provides information and lessons for anyone interested in learning about investing. Deeper discussions of shorting resources or more sophisticated strategies exceed that goal. Anyone interested in deeper explanations can arrange a private consultation by contacting me: (whitetop@WhiteTopInvestor.com).
4. Market response
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. Think of each stock as having a 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 is a significant part of market behavior. There must be both sufficient and significant volume of shares trading to successfully sell the shares short. The means stocks that trade in small volumes or that have limited investor interest are poor candidates for shorting.
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.
It also exposes the short seller to the risks of being forced off the position. We will cover these factors in a later part of this series.
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 means dangerous territory for the beginner or those not in the ‘in’. Just stay away. Sheep get sheared in such situations. Don’t be a sheep.
Our next discussion will cover the other factors investors consider before selling short.
Would you ever considering using a stock shorting strategy? Please comment or ask a question.
These bite sized lessons are intended to demystify investing. You can become a knowledgeable confident investor, one small step at a time. Please ask questions, I can help you better understand markets and investing. The White Top Views email list will not be shared or sold.
Have a great day!
White Top Investor
See all blog posts at: www.WhiteTopInvestor.com
Let’s connect, follow me:
Want site or blog content? Syndicate the White Top View, contact info@WhiteTopInvestor.com. These discussions are intended to help you better understand markets and investing. The White Top Views email list will not be shared or sold. I am not a financial or investment advisor; opinions are for informational and educational purposes only and are not intended as investment advice.
Image courtesy of FreeDigitalPhotos.net
Links to all parts of the White Top View series, the Short Story on Short Selling, follow below:
Part 8, Short selling has rules
Part 10, Four more positives of short selling
Part 12, Shorting stocks is hard