Determining the Best Stocks to Short Sell
In a bear market, many investors choose to take a short position, that is, short sell stocks in order to adapt to the downward trend and still make a profit. While short selling can bring with it a high level of risk, it also can be an excellent way to actively trade during market declines when others become more anxious about the market dip. If you’re interested in getting into short selling stocks, use this guide to understand how short selling works and how to find the best stocks to short sell.
Here are several key takeaways from this guide:
- Short selling stocks involves borrowing shares you don’t own and selling them at market price. When the stock prices fall, you buy them back at a lower price, making a profit from the difference.
- You can find the best stocks to short sell when performing a stock analysis on the various company stocks you feel will trend downward in the near future.
- There are many stocks that appear to be positioned to fall, and this guide will discuss why that can be advantageous for traders shorting stocks.
- When short selling stocks, it’s important to follow some basic guidelines to buffer against your risk and increase your success.
Understanding How to Short Sell Stocks
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When traders short a stock, they’re actually betting on the stock price falling, which means they don’t believe the company’s value will appreciate in the near future.
However, there’s more to short selling stocks than taking an opposing position in the stock market. Short selling requires borrowing shares from a broker and selling them at the current price with the goal of purchasing them back once the price drops. This means a trader can potentially profit from the difference between the price they sell the stocks for and the cost of purchasing them back. Rather than holding stocks for earnings and value over time, short-sellers can capitalize on a decline in a stock’s price when they sell the stock for a higher price than they buy it back for.
Even though the “sell high, buy low” mentality is the overall aim of short selling as a way to make a profit, this method of trading is aggressive and brings a considerable amount of risk. Because short selling requires borrowing the shares a trader sells, it obligates them to pay back the broker not only with the shares they borrowed, but with the interest from borrowing the shares, too.
So when you short a stock, the maximum capital gain you can make is typically capped at 10%, which means that if a stock falls all the way to zero, you’ll pay nothing when you return the borrowed shares. However, losses could potentially be unlimited because if the stock value climbs higher and higher until you’re finally able to buy the shares back, you could end up in a position where you can’t afford to do so. In this case, short selling requires the perfect timing because initiating a short at the wrong time can be extremely risky.
Because of the inherent risk of short selling stocks, it’s important to have a way to determine just which stocks are going to be good to short sell in the near future. With some thorough research and a few analytic techniques for predicting the movement of various stocks, you can figure out which stocks will be the best to short sell.
How to Determine the Best Stocks to Short Sell
S ince traders who short stocks are betting against a company’s ability to appreciate in value, they will watch a company’s performance in addition to the company shares’ performance. So the first step toward finding what stock to short is to perform some basic stock analysis. You can use stock screeners and other tools (like stock charts) to look at the performance trends of various stocks. This first step will give you an idea of what the different stocks on the market are doing in terms of rising or falling prices.
Next, it’s important to focus on the performance of the company with the shares you are interested in. When performing research on company stocks, it’s important to look for indicators of collapsing earnings, that is, signs that the company’s stocks will fall in value. Here are a few things to look for when evaluating a company’s performance in favor of falling stock prices:
- Unsustainable business practices.
- A failing or diminishing business model.
- Regulatory or legal scrutiny.
- An uptick in new competition for the company.
There can definitely be more indicators of a company’s likelihood of success or failure, but these few criteria are usually good places to start when researching a company’s past performance.
If you’re trading through a broker, whether a full-service stockbroker or a discount broker if they have something to say, pay attention to it. This is their job after all, and if they see a downward trend in your favor, it’s a good idea to listen to their advice. With research, analysis, and using your broker’s suggestions to your advantage, you’ll be able to find the best stocks to short.
Consider These Stocks to Short Sell
Of course, we aren’t a stockbroker or advisor, so we can’t tell you what to do. However, to give you an idea of what’s available in the current market, the following list outlines several stocks that are considered good short sell stocks. The list combines shares from a few well-known indexes, along with some basic information about each particular stock and why it’s positioned to fall.
Gritstone Oncology is a U.S.-based immuno-oncology biotech company focusing on developing personalized cancer therapies. The company momentum is sub-par, low in quality value, and has seen a steady loss. While Gritstone Oncology may have shares that would normally look unattractive to buy in a traditional market, these factors seem to be a lot of what active traders are looking for when it comes to shorting stocks.
Teledoc Health on the NYSE is a company specializing in round-the-clock and on-demand digital health care services via mobile devices, internet, video calls, and phone calls. A fraction of its revenue comes from in-office visits, while most of its other revenue comes through subscription fees, which come in varying levels.
With some plans containing subscription, access, and visit fees, it seems Teledoc Health is on a steady upswing in its profitability. However, without a significant history of this profitability, it’s highly likely that long-term investors will eventually stop buying up the company shares. This means that the value of the company’s stock prices could end up falling in the near future. So if a trader profits off of selling high and buying low, short selling this stock could come with the possibility of a return.
Match Group is a NASDAQ stock, and the company is the owner of many popular dating sites, including Match.com, OK Cupid, Tinder, and more. It’s gone up recently, even though it had seen a steady decline in the past. Match Group has also been involved in several legal proceedings dealing with the Department of Justice and the Federal Trade Commission. This is a good indicator that the company could likely fall further, offering a potential edge for traders who are shorting this stock.
Agenus Inc. is a biotechnology company based in the United States that mainly focuses on treatments for immuno-oncology. Several factors of Agenus’ approach to business operations indicate it as a potentially advantageous stock to short sell. It’s lost a bit already but has gained significantly, indicating the company’s shares are being overbought. This overbuying of company shares creates an imbalance in the market, something that short-sellers might likely take advantage of in the near future.
Ocugen Inc. is a clinical-stage biopharmaceutical company that focuses on the development and commercialization of innovative therapies treating underserved eye diseases. The company itself doesn’t appear to hold any momentum and the stock value has already seen a considerable decline. This means a potential return for traders who shorted shares of this stock at market value and want to buy them back at low prices.
With some time spent getting your feet wet with short selling stocks, you can build a valuable trading strategy to use when the market experiences downward trends. It’s all about determining which stocks to short sell, and with the information here, you have a starting point for research and analysis.
It’s important to remember that the company itself is ultimately one of the best indicators of your overall ability to make a profit in a falling market. By watching trends, following up-to-date information, and discussing trading strategies with your broker, you’ll be able to determine which stocks are going to be the most beneficial for you to short.