Short sellers expect share prices to fall. They seek to profit from this expectation by selling now and buying later, at lower prices. Specifically, they sell shares they don't yet own. They do this by arranging, through their brokers, to borrow stock to deliver to the buyers. Eventually the short sellers will have to return shares to the accounts from which they were borrowed. They do this by going back into the stock market and purchasing stock to deliver to the original lender. This method of trading will be profitable only if the stock sells at a lower price in the future, when the short seller must buy ("cover the short").

Market Guide allows you to monitor the actions of short sellers by providing the following data for each stock:

Short Interest represents the total number of shares that have been sold short, and it's depicted in the second column of our table. Column three tells us what percent of the total number of shares the short interest represents, and column four tells us the percent of the float represented by the short interest. Finally, column five shows us how many days it would take for all short sellers to fully "cover" their positions (i.e., buy enough shares to pay back all their loans of stock) at current levels of trading volume. All of this data is presented at four monthly intervals.

Scan each column up and down to see how short sellers have acted over a four-month period. If the short interest has been increasing over that period, it means that they have been turning increasingly bearish on the stock.

You'll often be tempted to avoid any stock with a large short interest. But remember: eventually, every short seller must become a buyer (in order to "cover" the short position, or in other words, repay the shares that were borrowed at the time of the short sale). That could put upward pressure on the stock price if any good news surfaces, as short sellers rush to cover their positions before the stock moves so high as to wipe out their potential profits (a "short squeeze"). Indeed, if the stock moves high enough, short sellers would lose money (i.e., if they wind up paying more to cover then they received when they sold short). Note, too, that a conventional (long) buyer cannot possibly lose more than the amount of the initial investment. There's no comparable limit on how much a short seller could lose, since there's no limit on how high a stock could rise above what was received from the short sale.