By Philip van Doorn
Short selling is a trading technique that gets especially popular during bear markets in stocks.
Short selling — or betting on a decline in prices — can come to the fore if investors suspect a company is entering a difficult period, during a period of stress on financial markets, or when a group of traders acts to bid up the shares of companies that professional investors have bet against.
It is a very risky technique, as the losses are theoretically infinite, but it is also something every investor should at least understand.
Traditionally, short sellers have served a useful role, as they have pointed out problems with companies’ business models, with their industries or even with the way they prepare financial statements. But shorting can also lead to furious trading activity that can burn investors quickly.
Apple Inc. /zigman2/quotes/202934861/composite AAPL -2.63% is now the most heavily shorted stock in terms of dollars committed to bets against the company’s stock price. Tesla Inc. /zigman2/quotes/203558040/lastsale TSLA +0.03% had previously been in that position.
But in terms of short positions relative to the number of shares outstanding, Apple’s is only 0.70% sold-short, while 2.32% of Tesla’s share are shorted, according to the most recent data available from FactSet.
There are different ways of looking at short exposure, and a list of the most heavily shorted stocks among companies of the Russell 1000 Index /zigman2/quotes/210598144/delayed RUI -1.57% , by percentage, is below.
Before digging into the short-selling data, let’s review some terms:
Short selling is when an investor borrows shares and immediately sells them, hoping to buy them back later at a lower price, return them to the lender and pocket the difference.
Covering is when a person with a short position buys the shares to return them to the lender, to profit if the shares have gone down in price since they were shorted, or to limit losses if they went up after being shorted.
A short squeeze is when a mass of investors looking to cover short positions start buying at the same time. The buying pushes the share price higher, making short investors accelerate their attempts to cover, which sends the shares spiraling higher in a frenzy. This is what happened earlier this year when a group of traders, who had organized themselves through the Reddit WallStreetBets channel, famously pushed the share prices of two troubled businesses sky-high: GameStop Corp. /zigman2/quotes/203755179/composite GME -3.36% and AMC Entertainment Holdings Inc. /zigman2/quotes/200235402/composite AMC -2.40% .
Short selling is best left to professional investors and traders because you cannot set an upper limit on how much you might lose if the shares rise in price after you short them — you never know how high a stock price might go. If you buy a stock (take a “long” position), what you have risked is the amount of money you invested. You can lose it all if company goes bankrupt, for example.
But to short a stock you need a margin account, which means your broker extends credit if the stock goes up in price after you short it. At a certain point, if the stock continues to rise, your broker will demand collateral to protect its position. This means you will be more likely to be forced to cover the short trade and take a loss.
Borrowing shares to short them also costs money — more about that below.
Most heavily shorted stocks
The Russell 1000 Index is made up of the 1,000 largest companies in the Russell 3000 Index /zigman2/quotes/210598149/delayed RUA -1.60% , which is designed to represent 98% of publicly traded companies whose primary stock listings are in the U.S.
Here are the 20 companies in the Russell 1000 that are most heavily shorted on a percentage basis, according to the most recent data available from FactSet: