Short selling involves trading of stocks that the seller does not own. A seller wanting to short sell a particular stock can borrow them from his broker. The stocks will be sold and the proceeds will be credited into the seller’s account. Sooner or later, borrowed stocks must be replaced. Sellers have to buy back these stocks from market and return them to the broker. One can make profit only when the stocks are bought at a lesser price than the price at which they were sold. Profit can be made on the difference. If the stock value rises, the seller needs to pay higher amount towards buying stocks. In this case, one loses money. Short selling is purely based on speculations and involves a variety of risks and pitfalls that one should be careful about.

Doing homework on short selling is a futile exercise. It is impossible for anybody to predict accurately about when a stock price will decrease in value. All the predictions are based on the trading patterns of a particular stock. It is also not advisable to trade against market history. In an active bull market, even marginal stocks have the chance of increasing in value. Once the value rises, investor is bound to lose money.

Short selling homework primarily involves selection of stocks. One can use the similar technique that was used for finding best stock picks. But, one has to look at the list from the bottom-placed stock. People usually select stocks that are in dire straits or those that appear vulnerable to any impending news. One can also look into companies that have recently started operations.