Shorting Penny Stocks

Shorting Penny Stocks

A consistent way to make money trading penny stocks is to look for them to lose value.  This is called short selling.  Shorting penny stocks has become a very popular trading strategy for many  traders.  Rather than hoping that a penny stock is going to move upward they wait till a penny stock makes a seemingly unwarranted increase in price and then step in and short them.  The chances are that the stock will pullback somewhat is not return to where it began its upward surge.

When you short penny stocks you are borrowing another investors shares that is kept in street name at a a brokerage company and using it to bet that the stock is going to decline.  If the penny stock loses value then you make money.  If the penny stock goes up in value you lose money.  When you think about it there is a better than average chance that penny stocks will decrease in value rather than gain in value.  This is especially true after  a big increase in price.

One of the best ways to find penny stocks to short is to follow some of the penny stock newsletters.  Often after a recommendation in a penny stock newsletter, the stock will spike upwards.  These present great opportunities to short penny stocks.  You can also look for companies who seem to be in trouble financially.   By reviewing their quarterly returns you should be able to see when they might run out of cash and either have to declare bankruptcy or at the very least issue more shares to gain more capital.  If they issue more shares they will dilute their stock price and the stock will drop.

You will need to make sure that you have a penny stock broker that is more adept at finding penny stock shares to short.  There are three companies that seem to stand out above the others.  They are Think Or Swim, Interactive Brokers and SogoTrade.  If you don’t use one of them you may have a difficulty getting some penny stocks to short.  The penny stock broker will have to locate shares before they can give them to you.

Now as always you need to be careful when you short.  Theoretically, there is an unlimited downside.  When you buy penny stocks you know what the downside is.   It can only fall to zero.  However, a penny stock can run upward for a long time.  I tend to stay away from one group in particular when shorting penny stocks.  I do not want to short biotech penny stocks.  Good news about a drug that they have in development can cause a large increase in share price.  I don’t want to be on the wrong side of that.