Shorting Penny Stocks - Is It Even Worth The Risk?

Shorting penny stocks has its fair share of risks and rewards with greater emphasis on the risks. This is because shorting in itself is dicey for the trader and when such risk is coupled with the volatile nature of penny stocks, you can have more troubles than you can deal with later on.

Certain conditions must also be met before short selling penny stocks can happen for the interested day trader. First, the stockbroker must have the microcap shares intended for the short sell in the first place. These nano shares may be the property of the stock brokerage firm or of one of the stockbroker's clients.

Second, your stockbroker must consent to the planned transaction. Many stockbrokers will not consent to shorting penny stocks under a specified threshold price, say, $5 per share. Ask your stockbroker for the details before short selling any stock in his portfolio.

We must also war n readers especially beginner and intermediate-level day traders from shorting any kind of stocks, more so the high-risk penny stocks. Otherwise, you are exposing your financial stability to unnecessary risks because the losses in short selling nano shares are limitless.

Consider this scenario: Your short-sell 100 shares at $10 apiece, which means $1,000 as profit. But the price of the shares rose to $80 when your stockbroker demanded their return, thus, costing $8,000 to buy back the shares. You lost $7,000 in the process!

The figure can rise higher when you cannot immediately buy back the shares and yet the price per share continues to increase. We did say that shorting penny stocks has unlimited loss potential, which cannot be said of regular shares.

So, what exactly is short selling? You are basically selling penny stocks borrowed from one of the abovementioned third parties.

You have the expectation of earning good profits from assets that are not yours in the first place. You also have the intention of repurchasing the shares at a later date, hopefully, when the price per share is lower at this time. Your profit comes from the difference between the stocks' selling price and the purchase price.

Indeed, shorting penny stocks provides for substantial profits if and when you know how to play the game. You must also possess a high tolerance for risks as discussed above lest you find yourself going crazy over the possibility of substantial losses on the transaction. The penny stock market never was and never will be for the faint-hearted and so is short selling.

Your next question then is: How do you maximize possible profits and minimize possible losses when short selling microcap stocks? We suggest the following:

• Perform the necessary fundamental and technical analysis of the penny stocks being planned for short selling as well as on the issuing company itself
• Buy back the penny shares as soon as possible. This is to avoid the prices from rising higher than the actual profits made on the short sell.

In conclusion, shorting penny stocks is a worthwhile endeavor with great profit potential but you must know exactly what you are doing and be willing to take the consequences.