Choosing stocks to short

A question from Yahoo! Answers:

What are some of the things that make short sellers want to short a stock?

There are plenty of approaches, and none works perfectly. You should do your own backtesting before you commit to any short-selling strategy.

Some short sellers look for companies that are suing short sellers in general and hedge funds in particular (typically, those are companies that have problems which they are not willing to discuss, so they sue short sellers to convince their shareholders that they don’t have problems). Others may look for stocks that have substantially increased in price during the last three years and now have unusually large trading volume. Yet others may look for stocks that have already lost some value in the last 3-6 months and continue to trade at a high volume. Those are strategies that have relatively long (months) expected holding periods.

There are also various short-term strategies. For example, some short-sellers look for stocks that have shot up during last week on unusually low volumes. The expected holding period for this strategy is about a week.

And then, of course, there are all kinds of technical strategies…

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