This stock investing for dummies tip is going to rock your world and send you laughing all the way to the bank. This is one of the best investing tips you are ever going to get: always know the short interest days to cover metric when playing the oversold chart pattern.
When you are beginning investing, shorting a stock is something that intimidates you so you form a mental block to any words or indicators that have the word “short” in them.
I learned from an investing for dummies pdf back in the 90s that shorting a stock means a bet that a stock will go down. Short sellers do this by selling the stock. How do you sell short a stock if you don’t actually own it? The mechanism for shorting a stock is that your brokerage firm will loan you the stock because you are shorting what you do not actually own. To close out the short, your brokerage firm lets you buy the stock back in the future. You don’t actually get the shares delivered into your trading account when you buy the stock back to cover your short. Your brokerage firm knows to apply the shares you buy back to close the short.
Investing For Beginners
Let’s back up and go over a concept that’s a good investing for beginners review. While this is investing basics it’s crucial that you understand this concept as we get into profiting from short squeezes.
More buyers than sellers make a stock go up. More sellers than buyers make a stock go down. Entering a short pushes the price of a stock down because it’s recorded as a sell. Closing a short position pushes the price of a stock up because it’s recorded as a buy.
What most investing for dummies pdf books don’t tell you is that you can benefit from traders shorting a stock by watching the short interest in a stock.
Shocking Investing For Dummies Strategy That’s Brilliant
This investing for dummies strategy you are about to learn is really a rather brilliant strategy used by stock trading geniuses. It takes advantage of too many short sellers piling into a stock. Just like too many traders can pile into a stock on the long side because of greed, the same thing can happen on the short side.
When someone is short a stock and the stock starts to rise, they feel pressured to close out their short position. That building pressure that causes a trader to close out his short is called a “short squeeze”. The possibility of a short squeeze is why some analysts look at a high amount of short interest as a bullish indicator.
Investing For Dummies – How To Find Short Interest In a Stock
To find the short interest in a stock go to http://www.nasdaq.com/quotes/short-interest.aspx
Enter in the ticker symbol of the stock you want to look up the short interest for, and click the Go Now button:
You are interested in the most recent date which is always going to be the top most line. This is free data so there is usually a 2 week delay:
The short interest days to cover metric is calculated by taking the total amount of volume short in the stock and dividing it by the average daily volume. Anything over 3 days to cover is a short squeeze candidate. The higher the days to cover is, the better because it means that if a short squeeze occurs, the stock will move higher up. Think of the short interest days to cover metric as a measure of buy side demand that could come at any time.
Investing For Dummies – Oversold and High Short Interest Days To Cover
What most investing for dummmies tutorials don’t tell you is that it’s not enough to just buy a stock because it has an oversold chart pattern or RSI. It also is not enough to buy a stock just because it has a high short interest days to cover.
The ideal stock you are looking for is one that has both a high short interest days to cover metric as well as an oversold chart pattern.
Frequently Asked Questions about Investing
What are good investments for beginners?
Good investments for beginners are stocks you can invest a small amount of money in, go for a 5% to 10% move up then exit, with a clearly defined stop loss if the trade goes against you. Investments that meet these criteria are usually going to be small caps with a beta of 1 or greater, that trade at least a million dollars a day in volume, and with an oversold chart pattern as your entry.
I have done several lessons on how beginners can find good investments that will be emailed to you over the coming days. Make sure you subscribe below.
What are investing activities on the statement of cash flows?
Investing activities on the cash flow statement reports the change in a company’s cash resulting from:
– The buying or selling of an asset (assets can be land, building, equipment, and securities.)
– Payments related to mergers and acquisition.
– Loans made to suppliers or received from customers.
– Proceeds from issuing short-term or long-term debt.
– Repayment of debt principal, including capital leases.
One of the criteria I use to screen for stocks is the Debt/Equity ratio. Companies with a lot of cash and little or no debt often have explosive moves out of an oversold chart pattern. Cash really is king. I will talk about this more in a lesson that you will be emailed next week (make sure to subscribe below to receive these lessons by email).
MoneyWeek posted the excellent video below called What is a Cash Flow Statement? This video will lay the foundation for why we use Debt/Equity in our stock screener.
What is short interest days to cover?
The short interest days to cover metric (also called the short ratio) is very important because it measures the amount of future buying that will take place in a stock because short sellers must buy back shares at some point to close out their positions.
The short interest days to cover is calculated as follows:
Short interest days to cover is not when short sellers must cover their short positions. It is simply a way to measure the amount of short positions in a stock. For example, if a company has an average daily volume of 1 million shares and 2 million shares are currently short, the short interest days to cover is 2 days.
MannyBackus with TradingTips posted the excellent video below called Short Ratio – What It Is and Why It Matters.
What is cyclical investing?
Cyclical investing is buying into extremely sensitive stocks that follow the Bull/Bear economic cycle.
These sensitive stocks are called cyclical stocks hence the term cyclical investing.
Examples of cyclical stocks are: automobile makers, airlines, furniture, steel, paper, heavy machinery, hotels, and expensive restaurants are the best examples.
Cyclical investing is extremely risky because it’s hard to time the economic cycle, especially when you consider that stocks lead the economic cycle anywhere from 3 to 9 months or more in the case of a slow recovery.
MrAlanKendall posted the video below called Economic Expansions and Stock Sector Rotation Explained.
It’s not enough to just buy a stock when it sells off. You need an additional piece of data that will make all the difference! You need the short interest days to cover metric! This is probably why you have tried buying oversold stocks but have failed at it. That one little piece you are missing, that one little “hole” in your learning, can jeopardize your trading.