Watch For The Bear Trap: Hedge Funds Short Selling Well Performing Stocks
Some heavily shorted stocks have gone up faster than others without bearish sentiments.
For many reasons, short selling stocks is tricky. Even institutions who have been following a company for years don't have nearly as much information as those on the inside.
Beyond that, when you bet on a company to essentially fail, you know there are hundreds or thousands of employees who are doing their darndest to prove you wrong. Finally, short selling can also paradoxically send a stock price up, even when the company isn't adding any value.
While some call short selling predatory, others argue it's an essential part of getting market prices close to fair value.
- Short selling occurs when you borrow shares, usually from a broker, and sell them.
- When the company's stock goes down, you buy back the shares at a discounted price and return them.
- This is called short covering – all this extra activity can send up a share price.
- And if too many people try to cover at the same time, it inflates demand for the shorted shares.
- This is called a short squeeze – and it can send a price through the roof.
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