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THE MARKET WHISPERER 24 5

Shorts for Advanced Traders

So far, I have reviewed the principles of short selling, why they exist (the
need to profit from dropping stock prices), and how the procedure is
conducted. Now it’s time to look deeper.

You know that when executing a short, you are selling shares that are
not yours in the hope that when the stock drops, you will buy it back at
a lower price than what you sold. Up to this point, it sounds simple, and
for many traders and investors that is all you need to know. But from the
viewpoint of those who like to understand how trading works, there is a
lot more to learn.

Can short selling be executed with every stock? What might happen if
you were interested in shorting on a stock your broker does not hold? In
actuality, you will discover that you cannot execute a short on all stocks.
The limitation is tied to the stock’s public ownership and the number
of open shorts on it. In other words, a stock with low public ownership
will not be held by a great many clients, and therefore the possibility of
your broker loaning it to you is limited. A second limitation often occurs
when a stock with high tradability drops sharply, usually as a result of a
newsworthy event. Sometimes the quantity of shorts on a stock is so large
that all available shares have been leant to other shorters. However, for
95% of the stocks with high tradability, which is the only type in which
we trade, shorts can be executed and any limitation is actually fairly
uncommon.

Example of a Stock that Temporarily Cannot be Shorted