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How to Select Stocks to Short

Even a failing company can make you money. Check out these tips on how to select stocks to sell short and see some profit.

Instructions

  • Step 1: Look for a company's Days Sales of Inventory, or DSI. If the DSI increases over time, current assets are outpacing sales growth, indicating a slowdown in production that could lead to a loss of consumer confidence and a lower stock value.
  • Step 2: Found a weak company? Look online for the stock's short interest figure, or the total number of shares already sold short. Look for a low number -- fewer people selling short means a smaller chance of many investors trying to cover simultaneously, which could drive up the price and leave you on the wrong side of the bet.
  • FACT: In 1602, the Dutch East India Company became the first company to issue shares of stock.
  • Step 3: Investigate companies' ability to adjust to consumer needs. Check online to find company profiles and news reports that discuss innovation strategies; consider taking a short position on those organizations that can't respond to changes in the market and might disappear over time.
  • Step 4: Learn about companies' management teams; consider shorting the stock of firms whose managers you think lack the experience and knowledge necessary to achieve financial success.
  • Step 5: Know what shorting stock means: investors who sell stock short borrow shares from a brokerage house and sell them to another buyer, with the proceeds going into the shorter's account. At some point, shorters must buy the shares back and return them to the lender. If the shares have decreased in value, the investor keeps the profit.
  • TIP: You can also think of selling short as betting against a stock.
  • : Talk to an investment professional before placing money in the stock market.

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