By John W. Schoen Senior Producer

The stock market's sell-off this week was not great news for most investors. But for folks like Patrick in Michigan, who is looking for information about selling stocks short, even a "bad" week can be profitable. Here's how:

INTERESTED IN SHORT INTEREST
Where is the best site to find out the actual short position of traded stocks on the exchanges?
Patrick M. -- Northville, Mich.

You can look this up on the Web sites of the two major exchanges. You’ll find short interest for individual Nasdaq stocks here. Over at the New York Stock Exchange, they give you a one huge spreadsheet with enough data to choke your PDA. The problem with these numbers is that they are only updated monthly, and short interest can change dramatically between reports for a smaller stock. Especially when bad news puts a stock on the “short list” for short sellers.

Short interest, for those Answer Desk readers looking for a refresher, is the number of shares of a given stock that traders have borrowed and then sold. This upside-down “short sale” trade lets you profit from the drop in a stock’s price. After you borrow and then sell the stock, you wait for the stock price to fall and then buy someone else’s shares (for less than you got when you sold), returning the shares to the person you borrowed them from. So your profit is the difference between the money you got from selling the borrowed stock and what you paid to buy it back. That’s why you’ll sometimes hear the much more common form of stock trade -- where you buy the shares first, wait for them to go up, and then sell them -- called a “long position.”

The major wrinkle in this short selling strategy is that if the stock goes up, you lose money. And if lots of other traders have “shorted” the stock, and it goes up, you’re all going to want to buy shares at the same time to cut your losses and return the shares to the people you borrowed them from. That’s called a “short squeeze” because all that buying demand can send a stock’s price even higher, forcing more short sellers to buy, driving the price higher, setting off a powerful upward cycle. In the end, short sellers can lose a bundle of money pretty fast. (Technically, this is called “taking it in the shorts.”)

Short selling tends to create the most volatility in stocks that are not very heavily traded, because too much short selling by itself can drive down a stock’s price. Some short sellers have even been known to sell a stock and then spread false rumors about a company to drive the price down. (Technically, this is called “market manipulation” -- and it’s a crime.)

Because a high level of short selling can create this kind of large buying demand, some investors take it as a bullish sign. The problem is you can’t always tell whether the short sellers know more about the stock than the bulls.