Author: Let’s Talk Money! with Joseph Hogue, CFA
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Retail investors have a new weapon against the short sellers and it could mean a short squeeze comes soon to drive stock prices for the most shorted stocks. Do not miss this video and what it means for short sellers and Main Street investors!
In this video, I’ll show you the 20 most shorted stocks including short interest in each. I’ll explain who are the short sellers borrowing and selling these stocks and why they do it. Then I’ll explain a short squeeze and how it sends stock prices higher fast and reveal a new investing trend that is making a short squeeze more likely in the most shorted stocks.
I’ll share the list of most shorted stocks by short sellers but understand, these numbers change fast. Before you invest, use a resource like Yahoo Finance or S3 Partners to find the most current short interest and heavily shorted stocks. Then check a stock chart of the stocks. If a stock sees a rapid rise in the price, it’s probably a short squeeze and some of the short sellers may already be shaken out before short interest is updated.
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Knowing the most shorted stocks is only part of the puzzle though. You also need to know, who are short sellers and why short stocks? These are typically hedge funds or other institutional managers betting that a share price will go down, so they borrow the shares through a broker and sell. Now since they don’t actually own the shares, this creates selling pressure because it dumps shares on the market.
The idea is that, if the stock price falls, the short seller can buy the stock back for cheaper to cover the borrowed shares. But what happens in a short squeeze is, the price rises and the short seller is facing a big loss. If the price rises enough, the short sellers give up and rush to close their positions by buying the stock back to return their borrowed shares. With millions of shares now being bought by shorts, that supercharges the stock price higher!
Lately, retail investors are pulling their shares off broker platforms, using direct registration services to take custody of the stock and keep it from being loaned out to short sellers.
You see, when you hold stock on most investing apps, the broker reserves the right to make those shares available to short sellers. It increases the number of shares available to be borrowed and shorted.
But if you direct register your shares and take them off the platform, they aren’t available anymore. That makes it harder to borrow and short the stock, making it more expensive for short sellers and more likely they get hit with a short squeeze. There are services like Computershare Ltd that does this, direct registers your shares and holds them in your name out of reach of lending brokers. You’re still holding the shares online but it’s off a broker platform.
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Joseph Hogue, CFA spent nearly a decade as an investment analyst for institutional firms and banks. He now helps people understand their financial lives through debt payoff strategies, investing and ways to save more money. He has appeared on Bloomberg and on sites like CNBC and Morningstar. He holds the Chartered Financial Analyst (CFA) designation and is a veteran of the Marine Corps.