Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Weak Shorts

What it is:

Weak shorts are investors who short sell a stock (known as being "short"), but who will buy it back at the first sign of a price increase.

How it works (Example):

Short-term traders typically only enter a short position long enough to capture a quick gain on their investment. Weak shorts don't want to take a loss on their short-term investment, so they will typically set tight stop-loss orders that instruct their brokers to close out their short positions if they lose even a small amount of money.

Why it Matters:

Weak shorts piling in and out of a stock can make that stock's price very volatile. Consider: If most of the people selling a stock are weak shorts, when the price increases for any reason at all, the stop-losses that the weak shorts have set will be triggered, causing a rash of buying (i.e. closing out the short positions) and driving the price up very quickly.