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The short selling of stocks on the financial markets is a practice traders and investors may use to make profits in both bull or bear market conditions.
Typically, to “short” stocks the trader borrows a company’s stock share from another trader (investor), sells them and waits for the stock’s price to decline before closing out the position by buying the shares back. The profit is represented by the difference between the initial higher selling price and the lower repurchase price.

Profit in all Stock Market Conditions
The practice of short selling allows traders to make money in weak companies or in bad markets. Short sellers often search for stocks they believe are poised to fall. A clear understanding of the stock market is vital for traders to use short selling as a strategy as history shows that over the longer time frames, the markets have an inherent upward bias.

Timing is far more important when short selling shares and positions are usually not left open for long periods. Day and swing traders carry out the bulk of short selling that takes place in the markets. These traders generally look to make smaller profits, more often, taking advantage of hourly, daily or weekly price fluctuations.

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Technical Analysis for Short Selling
Using technical triggers for short selling becomes important as it may take some time for fundamental weakness of a company to be recognized by the general market. Short sellers have an edge in bear markets as the majority of stocks have some amount of price depreciation. Some longer term buy and hold investors sit on the side lines waiting for a new bull market to take hold and do not use short selling techniques to take full advantage of stock market cycles.

Action on the short side of the market is usually much quicker and studies show that, on average, prices decline three times faster than they usually rise. This can be due to fear and panic and also major levels in which numerous stop orders may be placed in the market, causing a flow on effect. It is generally wise to place a stop order in the market with both long and short positions to maintain risk management techniques.

Considerations for Short Selling
Other considerations to take into account when short selling include the way dividends are treated, margin and interest requirements and the brokers’ rules on individual stocks, as not all stocks can be borrowed for selling. Online trading platforms offer different services and traders should become familiar with the products they utilize.

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General Stock Trading
As with all stock trading styles and techniques, it is wise for traders to maintain strict discipline, use stop-loss orders, use good money management procedures and set targets to give a favorable risk/reward ratio. Traders and investors do not need to be right all the time, they just need to lose the least amount of money when they are wrong.

Gains can be made in both bull and bear markets and short selling shares on the stock market is another technique savvy traders can use to make profits.

References:

Fire Your Stock Analyst, Harry Domash, (Financial Times Prentice Hall, 2003)
Super Trader, Van K. Tharp, (McGraw-Hill Books, 2009)


Read more at Suite101: Short Selling Shares on the Stock Market | Suite101.com http://suite101.com/article/short-selling-shares-on-the-stock-market-a224107#ixzz21V5h2D00