What are the things a professional trader considers in a stock for short-selling?

Question

What is that they usually follow, what are their technical aides? What are the factors that they think would support short-selling? Just any professional trader.

Answer 1

Stock needs to have supply and not be already too short (which could result in others covering). Additionally you will want to have a catalyst that will result in either an up or down move. Example is the company has a drug that is passing phase 2 testing and the market has already priced-in that the drug will go to phase 3 trials.
You will also want to review current short interest and understand the rationale for the short. Also, professional traders (be it sales traders, prop traders, hedgies, or buy siders) all communicate via IM during the day. You would want to be as close as possible to that inner circle. Briefing.com is a good way to also start to go.

Answer 2

Someone here said that short-sellers look for stocks that they think will lose value. This is not true.

Most short selling is done in conjunction with a long sale -- so investors don't care about direction -- they just care about relative direction.

Let's look at an example. You believe that Company A is coming out with a new product that will revolutionize its industry. Company B is also in this industry & will be hurt byu this new product. You buy Comapny A and short Company B. You hope that A will go up and B will go down. However if both go up, you still make money as long as A does better than B.

This is the basic idea behind Long-Short hedge funds.

How do they pick these companies to short? If you have private information about a firm -- that can help. But often what they do is do a regressino of stock returns against various factors (including interest rates, broad market returns, perhaps some macroeconomic factors or the Fama-French factors, etc). They then choose those firms with statistically significant positive alphas to buy and with statistically significant negative alphas to sell.

Other factors -- like cost of carry -- come into play. Cost of carry increases if the shares are expensive to borrow or if the stock in question pays dividends.

Answer 3

The main reason a trader is interested in selling a stock short is because he or she believes the price of the stock is going to be lower than the current price at some future point in time. Each professional trader must develop their own unique methodolgy and money management system to guide them in their decision making process. Thier are many good books out there for people interested in in participating in the markets. ie...Martin Prings Intro to Technical Analysis,Elliott Wave Principle: Key to Market Behavior by Robert Prechter, Japanese Candlestick Charting Techniques Revised Edition by Steve Nison,Trading for a Living
by Dr. Alexander Elder

Answer 4

At some point when the market has fallen enough and short sellers have profited, they exit by buying to close. This provides a bid under the market. If you ban short selling and the market is in mass panic then this natural floor will not be in place.

Answer 5

Professionals use alot of data points such as:

1)The insiders(mgmt) selling their stock

2)They watch the sales data of the company

3)They watch for signs of companys wishing to borrow extra money

4)They determine the companys product/new product viability or new competitors for such product

5)upper management quitting their positions or even a slight change in their attitude toward the company.

these are a few things and they are not readily available for the small investor until after the fact.

Answer 6

I can email you the companies I sell short everyday if you want.

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Answer 7

In addition to all, most of them have inside information about the company's performance..

Answer 8

know the stoichatics, and volume trends are consistent for the direction you want to short. Cover your calls/puts.