Short selling gets a bad rap. Short sellers are sometimes seen as vultures, gleefully making money during the darkest times for some companies. And when times get tough, they are often smeared as manipulators of the market.
However, short selling has a long history, and academic research proves these tactics are an important part of price discovery for markets.
So what is short selling? Put simply, it’s borrowing shares of a stock or ETF so you can sell them first, then hoping it declines so you can buy shares back at a lower price in the future, thus generating a profit. And rather than moralizing over the nature of it, wise investors should view short selling as one more data point to explore in their research, and view heavily shorted stocks as particularly interesting.
By comparing the raw number of shares sold short with the overall number of shares a company has available to trade, investors can get a quick take on what percentage of the current interest in the stock is coming from bearish investors vs. bullish ones.
It’s worth pointing out that like any measure, short interest in a stock is not a foolproof sign it will stumble. There is ample evidence that bearish investors can be wrong. And unlike buy-and-hold investors who can just sit on a paper loss and hope conditions change, short-selling bears who booked the sale first must buy shares back for steep losses and cover their risky trade whether they like it or not. This can lead to a phenomenon known as a “short squeeze,” in which buying begets more buying as more short sellers are forced to bail out of their positions.
Here are 18 of the most heavily shorted stocks on Wall Street right now. For each of these companies, total short interest by negative investors represents at least a third of the “float,” or shares available for regular trading on public markets. But in many cases, it’s far more.
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