How to Buy Strong Stocks That Sell Weaker

It may seem like a conundrum–the idea of looking for strong stocks which sell weaker, or at a lower price. But just as traders can make money buying stocks which go up in value, they can also make money selling (or borrowing) stocks which depreciate in value. Selling stocks to make a profit is called short selling, and the goal is to sell stocks which you believe will go down in the future. The challenge is figuring out which stocks will sell later at a lower price.

• Understand the process of selling “short.” Shorting stocks means selling stocks with the hope of buying them in the future at a lower price. The difference between the current price and the later lower price point is the profit. This is also known as “borrowing stock” because traders must effectively borrow the stock in order to sell it.
• Find industries or businesses that are experiencing difficulty. This difficulty can be due to cyclical or economic issues.
• Use fundamental analysis, such as valuation ratios (price to earnings ratio), economic indicators (inflation or interest rates), and the companies’ debt ratios to find stocks that are overvalued or overbought. A stock is considered overbought when it has had a sharp price increase or a wave of buying and the price is expected to decline in the future.
• Use technical analysis, such as charting the price and volume of the stock over the past 5 years, and their moving averages to find stocks that are overvalued or overbought. Two common moving averages to check are the 50-day and 200-day moving averages.
• Choose 5 stocks which fit your chosen criteria. That is, find at least 5 stocks which are in a declining industry, and are overbought according to both fundamental and technical analysis. Use fundamental and technical analysis to pinpoint which stocks to buy and then later sell when their prices fall.
• Contact your broker or use a discount brokerage firm to purchase the best stock identified in
• . Pick a price point to later sell the stock for a profit. Also have a price point for selling the stock to minimize your losses if the stock rises in price after you have bought it. In general, you will need to have at least $5,000 in order to open an account which qualifies for short sales.