Refresher course for short sellers
With the way PAIV rebounded on Friday from 35% DOWN to end at 13%, I am loading up some more PAIV because is believe that the stock might open above .0. 5, and also because I believe the company is turning around. And if all these shorts sellers are covering their positions from short selling in may, then this stock will be a rocket. They say that so many people have become millionaires just from investing in pennystocks and I hope I will be one of them through PAIV.
Short Squeeze - If a stock starts to rise rapidly, the trend may continue to escalate because the short sellers will likely want out. For example, say a stock rises 15% in one day, those with short positions may be forced to liquidate and cover their position by purchasing the stock. If enough short sellers buy back the stock, the price is pushed even higher.
Short-Interest Ratio
The short-interest ratio is the number of shares sold short (short interest) divided by average daily volume. This is often called the "days-to-cover ratio" because it tells, given the stock's average trading volume, how many days it will take short sellers to cover their positions if positive news about the company lifts the price.
Let's assume Microsoft has a short interest of 75 million shares, while the average daily volume of shares traded is 70 million. Doing a quick and easy calculation (75,000,000/70,000,000) we find that it would take 1.07 days for all of the short sellers to cover their positions. The higher the ratio, the longer it will take to buy back the borrowed shares - an important factor upon which traders or investors decide whether to take a short position. Typically, if the days to cover stretch past eight or more days, covering a short position could prove difficult.
If you have a margin account and your equity level has fallen below the firm's maintenance margin requirements, then the brokerage has every right to sell your securities without contacting you or obtaining your permission. Most often, firms are not required to give you a margin call, so if they give one, they are doing so as a customer service gesture. The actions you can expect from your brokerage are spelled out in the margin account agreement that you signed upon opening the account. To ensure it receives the money you borrowed, the brokerage will sell your account's securities regardless of whether you lose money on the trades - the broker may not necessarily use a strict method when picking the stocks to sell out of your account. Instead the stocks that are sold to cover the entire deficit in the equity level may, for example, be picked in alphabetical order. To top it all off, upon selling your securities, your broker may even charge you a full commission for the transaction.
