What are some of the things you consider before shorting a stock? Must there be a general downtrend in the market -- the sector the stock belongs to? If so how long? Surely you never just say "Ok that has to be high enough for this stock, now I'm gonna short". There must be something more solid that factors in your decision than that. Comp
The first thing to consider is the basics of shorting stock. Always remember your ultimate loss potential. When you go long a particular stock, your loss is limited to the amount of money you spent in order to purchase it. You purchase 100 shares of a $90.00 stock, your ultimate loss potential is limited to $9,000.00. When you short stock, theoretically your losses are unlimited. That same $90.00 stock can run dramatically higher, split, keep running, etc... So be sure you know your loss potential. Many traders were seriously hurt trying to short the tech bubble of 1999/2000. Eventhough their thesis was ultimately proven to be correct, the point at which they shorted was critical. 1. Remember, the markets can stay irrational much longer than you can remain solvent. 2. It's always a dangerous game; calling tops and picking bottoms. Good Luck!
Shorting is NO DIFFERENT than going long and knowing where you'll get out. The reason that people say, "Shorting is risky" is because the tacit assumption is that Blind-to-the-world Bob will just go long his mutual fund and check it once per year and that it's unlikely to go to zero. Shorting is no more risky than going long AS LONG as you know where you're getting out if your thesis is proved false. A bad investor asks, "What's my reward?" A good investor asks, "What's my risk?"