The Short of It
Wednesday, April 23rd, 2008
By Michael Lombardi, MBA for Profit Confidential
If you are not familiar with “shorting” a stock, it is a process by which an investor can make money when a stock is falling in price. The same way you call your broker and say, “Buy 100 shares of ABC Company,” with shorting you call your broker and say, “I’d like to short 100 shares of ABC Company.”
To make money shorting, the stock that you are betting will fall in price needs to do exactly that. If the stock rises in price, you have to either pay the difference between the stock’s new high price and what you shorted it at or actually buy the stock at its new high price.
There’s big money in shorting individual stocks that are experiencing decreasing market share, management changes or simple profitability issues. And it’s really not that complicated. (We actually have a newsletter on short selling that delivered a profit of over 100% per recommendation in 2007. Learn more at:http://www.lombardipublishing.com/ads/ssc/index.asp)
I’m not a big fan of shorting large-cap stocks, like those stocks that comprise the Dow Jones Industrial Average. Whenever a stock price gets too far ahead of itself, short sellers come in and bet that the stock will fall in price. For years short-sellers bet that Google had risen too far in price. Sometimes the short sellers made money when Google stock came down, but most times they lost, as this anomaly in the tech sector just kept moving higher in price.
The reason I am bringing up short selling today?
The New York Stock Exchange publishes figures that tell us how many shares are sold short on the NYSE. Recently released figures on the NYSE are shocking.
There are over 16 million shares now sold short on the NYSE — a near record. Stocks on the NYSE are big-time stocks. And for those short sellers to make money from stocks they have shorted on the NYSE, they need lower stock prices.
In the event that the short sellers as a group are wrong (and they usually are when they take such big positions), a rising stock market will put a classic “squeeze” on the short sellers as they cover their positions. I believe that this could result in current stock prices moving sharply higher, as the short sellers are forced to buy stocks they originally shorted. That, my dear reader, is the short of it.
Next Post: Heavy Equipment Stocks Going Full Steam AheadPrevious Post: What Financial News is Telling Us
Tweet
Sign Up for PROFIT CONFIDENTIAL and
receive a FREE copy of our exclusive report:
"A GOLDEN OPPORTUNITY FOR STOCK MARKET INVESTORS"
We respect your privacy and
will never share your e-mail address.
Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
