What happens if too many people decide to short sell?

[Ken]

Just wondering what happens if too many people decide to short sell?

Does that mean the price would go up due to people buying the stock in order to short sell?

Just a dumb question?

When you hear people talk about shorting could almost be a sign to buy.

As most shorters are onto it too late.

Market has fallen 600 points... If the economy is not melting down, which chances are it isn't surely we are over half way through this correction.

Just a thought... people may become unstuck like the people who thought stocks were going to rise for ever. If they think stocks are going to keep falling, they are forgetting the big stocks like the banks are still making profits. And paying dividends.

 

[Bush Trader]

You have to decide if there is a fundamental change afoot or just some poor short to mid term sentiment.

As far as the question is concerned, I think that people who short stocks generally run with tighter stop losses, so if there is a cat about (alive or dead, they often get stopped out pretty quickly). It would be very hard mentally to short a stock at the moment in what has been a fantastic bull run IMO. It is always easier to be long or on the sidelines.

Cheers


BT

 

[Flying Fish]

How does one short a stock. How does one not know this is a crash?

 

[Ken]

My guess is the interest rates, and the fact unemployment is still low, and Companies are still making bumper profits.

If its a crash and Commonwealth Bank was to halve, the dividend would be 10%....

 

[tasmanian]

im short atm and have been for the last few weeks.so im pretty happy with the big drops atm.but i dont like to see people loosing money.

i treat a short as same as buying long.when a stock breaks through support or has bearish candle patterns ill short it.and when the markets like this you would be much better going short than long obvisouly.there has been plenty of signals the last few weeks screaming too go short.

its good in the sense that when people panic as now stocks go down alot quicker than up as they say up by the stairs down by the elevator.

the thing is stocks can only drop to 0 and they are very rarely going down that far but when rising the skies the limit really.But alot of technically weak stocks can drop over 100% so doubling your money is still possible and more.

im in no rush to buy back my shorts atm just have a trailing stop and let the profits build up.

we broke through the 200dma today so im expecting to go abit lower yet then there is a good chance we will come back up too test it.if it bounces off that and drops again there will be another great oppurtunity too short or top up on shorts your already holding.

alot of people dont like shorting but i believe its important to do and learn to do it with low risk trades.why just make money on the way up in a bull market then hold or sit on cash when you can make plenty on the way down as well.

this market is a shorters dream.everything ive got on a short is getting hammered when i was long not everything went up this quick.

personally think lots more downside to come but who really know let the market tell the story and now its saying be short.

good luck all be careful its bloody nasty out there atm

 

[clowboy]

My guess is the interest rates, and the fact unemployment is still low, and Companies are still making bumper profits.

If its a crash and Commonwealth Bank was to halve, the dividend would be 10%....

Yea, but 10% aint that great when you can get 8% in the bank (before the latest hike) and rates are on there way up, 2% premium for how much risk?

 

[Ken]

I tend to think its easier to see a stock in a down trend. if you know there is no news flow, or its in an ugly sector your fine.

Only problem would be takeover targets.

But I guess thats where you have your stop loss...

How would you go about shorting a company like AVX?

I think any company without cash flow, is worth shorting in this environment. if the market goes stale for a couple of months the lower end of the market is worth shorting. non-dividend paying speculative stocks. possible?

Any thoughts? Its much easier to find a dud than a gem.

What broker do you use? Can I set it up through westpac?

Details on how to set up shorting

 

[tasmanian]

Ken,

I short my stocks through IG markets.I do all my shorting through cfd,s.not sure about other ways .commbank does it but brokerage is more expensive and good margins with ig.check the margin on the stock before you short it some are %5 some 10% some 50% and some stocks you cant short.

The reason for cfds is low brokerage and they pay interest on shorts.whereas they charge you interest for longs they actually pay you interest for shorting.its a few % below the actual bank rate nothing to get excited about but better than getting charged interest as going long or margin loans etc.

You would think its easier to find a stock that drops than goes up but doesnt always work like that so just be warned.

watch out for when dividends are paid as instead of getting the dividend you will actually pay it when shorting.generally the stock drops by the dividend amout so thats suppose to work itself out but take note when ex-dividends date is due.

and just because this market is dropping hard it can have big bounces in to positive territory so be patient wait for low risk shorts where a stock has dropped then come back to resistance then short it so u can have a small stop loss set up.then pyramid your position as it makes new lows.look at the chart make sure the stock is in a downtrend already and never short a stock making new highs thinking it will go down because its too high.

its basic it too do it its just like buying but instead of hitting the buy button you hit the sell.
so you sell it 1st then buy it back when you want to close the trade out.you are borrowing the stock off your broker when you 1st sell it short then buying it back and returning it too him when you buy it back hopefully at a profit.

good luck with it definetely a required tool if you want too make money in bull and bear markets

 

[CFD]

Nice post tasmanian.
In theory stocks going exdiv. should drop in value by the div plus the value of the franking credit. CFD shorts get charged the value of the div. only, so you should come out in front. It would work against you being long when a div. is paid, in theory.

 

[Mofra]

As I understand it, when shorting physical equities (derivatives are a different beast):
a. You can only short on an uptick, to avoid a large fundie dumping a stock, creating a panic & buying back cheaply
b. There is a set limitation to the number of shares that can be "short" in any one company at any one time (may be an arbitrary 10% but would need to confirm).

The shorting control limiting the number of short options was introduced due to the precipitating short covering leading up to the 1929 crash - I'm sure some smart cookie out there has more information.

 

[CanOz]

As I understand it, when shorting physical equities (derivatives are a different beast):
a. You can only short on an uptick, to avoid a large fundie dumping a stock, creating a panic & buying back cheaply
b. There is a set limitation to the number of shares that can be "short" in any one company at any one time (may be an arbitrary 10% but would need to confirm).

The shorting control limiting the number of short options was introduced due to the precipitating short covering leading up to the 1929 crash - I'm sure some smart cookie out there has more information.

In the US the uptick rule exists for sure...but here? I don't think retail traders can actually short stocks...

In any case, brokers must be able to get a LEND of enough stock to the client that wants to short it, quite often, even with CFD providers, they can't borrow enough to short.

Does this make sense

Cheers,

 

[jurn]

As I understand it, when shorting physical equities (derivatives are a different beast):
a. You can only short on an uptick, to avoid a large fundie dumping a stock, creating a panic & buying back cheaply

The uptick rule has been eliminated recently:
http://www.sec.gov/rules/final/2007/34-55970.pdf
http://en.wikipedia.org/wiki/Uptick_rule

 

[kerosam]

i did my first short two days ago and made a second short a day later. the challenging thing is to find an entry price (in this case, 'sell'). the first stock i short gap me twice... so the order didn;t get executed till yesterday.

then there's setting stop-loss. i use a GSL. Broker Mac Prime. the spread is about $1 to $1.20. So i had to go for a slightly less tight stop loss than my usu. 3%.

comments appreciated.

 

[juw177]

The more people shorting, the more volatile the stock is. You will get what is known as a short squeeze when the price of the stock starts rising and all the shorters are covering their positions and this can be dangerous. So better to avoid shorting stocks where many people are also shorting.

 

[Uncle Festivus]

For CFD's, the short answer is that the provider takes it off their shortable list.

 

[lbradman]

im short atm and have been for the last few weeks.so im pretty happy with the big drops atm.but i dont like to see people loosing money.

i treat a short as same as buying long.when a stock breaks through support or has bearish candle patterns ill short it.and when the markets like this you would be much better going short than long obvisouly.there has been plenty of signals the last few weeks screaming too go short.

its good in the sense that when people panic as now stocks go down alot quicker than up as they say up by the stairs down by the elevator.

the thing is stocks can only drop to 0 and they are very rarely going down that far but when rising the skies the limit really.But alot of technically weak stocks can drop over 100% so doubling your money is still possible and more.

im in no rush to buy back my shorts atm just have a trailing stop and let the profits build up.

we broke through the 200dma today so im expecting to go abit lower yet then there is a good chance we will come back up too test it.if it bounces off that and drops again there will be another great oppurtunity too short or top up on shorts your already holding.

alot of people dont like shorting but i believe its important to do and learn to do it with low risk trades.why just make money on the way up in a bull market then hold or sit on cash when you can make plenty on the way down as well.

this market is a shorters dream.everything ive got on a short is getting hammered when i was long not everything went up this quick.

personally think lots more downside to come but who really know let the market tell the story and now its saying be short.

good luck all be careful its bloody nasty out there atm

I dont entirely agree this is a shorters dream. It is a very volatile period but just because its been going down more than its going up doesnt mean you should short. Doing so in my opinion is speculation. I'm only saying this because I got burnt trying to short like you did a week before the interest rates were expected to rise and the initial fallout from the US subprime woes started to dampen markets. I shorted everything I could holding 5 shorts at one point and was in profit immediately. The friday 22 July US markets dropped heavily and my "prediction" going into monday was that this on top of the certain interest rate hike would cause a major drop. But as it turns out the ASX bucked the move and actually rallied monday and into tuesday hencing squeezing all my shorts for a big loss only to drop again then bounce again and so on.

What I'm saying is its too early to call a short or a long in this market its just too volatile. My view is to stay out of this market until some order has been established.

 

[professor_frink]

I dont entirely agree this is a shorters dream. It is a very volatile period but just because its been going down more than its going up doesnt mean you should short. Doing so in my opinion is speculation. I'm only saying this because I got burnt trying to short like you did a week before the interest rates were expected to rise and the initial fallout from the US subprime woes started to dampen markets. I shorted everything I could holding 5 shorts at one point and was in profit immediately. The friday 22 July US markets dropped heavily and my "prediction" going into monday was that this on top of the certain interest rate hike would cause a major drop. But as it turns out the ASX bucked the move and actually rallied monday and into tuesday hencing squeezing all my shorts for a big loss only to drop again then bounce again and so on.

What I'm saying is its too early to call a short or a long in this market its just too volatile. My view is to stay out of this market until some order has been established.

What was your plan when you put the short trades on? The market had already peaked at the time you put them on.

Severe rallies are a staple part of a down move. You won't find a calm and orderly decline very often.

 

[lbradman]

hi professor i guess I have to say I am a trend follower and base my trades only on clear cut trends up or down. In this market its not trending its just swinging wildy up and down and personally for me too dangerous to take a trade. I can see the logic in wanting to take the opportunity to short as soon as price broke support and a bearish candlestick formed but for me that is too aggressive if your bucking the main uptrend and I applaud tasmanian for doing so but its a case of being rewarded highly for taking a high risk trade. I'd rather trade on high probabilities and get rewarded slowly but consistently. I'm only saying this now because I got succumbed by greed thinking its a great time to short like tasmanian was thinking and broke my system rules to take those opportunistic shorts which backfired. If this volatility does turn out to be the start of a bear market then congrats u picked the top! but I'd rather be patient and wait for that confirmation of a downtrend is in place and enter on the pullbacks. Right now however its just chaos and no direction is really established yet and taking a short or long is almost like gambling to me.

 

[Mofra]

The uptick rule has been eliminated recently:
http://www.sec.gov/rules/final/2007/34-55970.pdf
http://en.wikipedia.org/wiki/Uptick_rule

Cheers Jurn - must have some hedge fundies licking their lips on lower volume plays