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Weak Shorts

What is 'Weak Shorts'

Traders or investors who hold a short position in a stock or other financial asset who will close it out at the first indication of price strength. Weak shorts are typically investors with limited financial capacity, which may preclude them from taking on too much risk on a single short position. A weak short will generally have a tight stop-loss order in place on the short position to cap the loss on the short trade in case it goes against the trader. Weak shorts are conceptually similar to weak longs, but the latter employ long positions.

Explaining 'Weak Shorts'

Weak shorts are more likely to be carried out by retail traders rather than institutional investors, since their financial capacity is limited. That said, even institutional investors may find themselves in the weak-shorts camp if they are financially stretched and cannot afford to commit more capital to a trade.


Further Reading


How are shorts informed?: Short sellers, news, and information processing
www.sciencedirect.com [PDF]
… Volume 105, Issue 2, August 2012, Pages 260-278. Journal of Financial Economics … sales are not from market makers but rather from clients, and we find only weak evidence that … Thus, there appears to be little support for the claim that return predictability from shorts is greater …

Discussion of value investing: the use of historical financial statement information to separate winners from losersDiscussion of value investing: the use of historical financial statement information to separate winners from losers
www.jstor.org [PDF]
… Volume 105, Issue 2, August 2012, Pages 260-278. Journal of Financial Economics … sales are not from market makers but rather from clients, and we find only weak evidence that … Thus, there appears to be little support for the claim that return predictability from shorts is greater …

The economics of IPO stabilisation, syndicates and naked shortsThe economics of IPO stabilisation, syndicates and naked shorts
onlinelibrary.wiley.com [PDF]
… Volume 105, Issue 2, August 2012, Pages 260-278. Journal of Financial Economics … sales are not from market makers but rather from clients, and we find only weak evidence that … Thus, there appears to be little support for the claim that return predictability from shorts is greater …

Value investing: The use of historical financial statement information to separate winners from losersValue investing: The use of historical financial statement information to separate winners from losers
www.jstor.org [PDF]
… Volume 105, Issue 2, August 2012, Pages 260-278. Journal of Financial Economics … sales are not from market makers but rather from clients, and we find only weak evidence that … Thus, there appears to be little support for the claim that return predictability from shorts is greater …

Weak Correlations of Stocks Future ReturnsWeak Correlations of Stocks Future Returns
arxiv.org [PDF]
… Volume 105, Issue 2, August 2012, Pages 260-278. Journal of Financial Economics … sales are not from market makers but rather from clients, and we find only weak evidence that … Thus, there appears to be little support for the claim that return predictability from shorts is greater …

International portfolio choice and corporation finance: A synthesisInternational portfolio choice and corporation finance: A synthesis
onlinelibrary.wiley.com [PDF]
… Volume 105, Issue 2, August 2012, Pages 260-278. Journal of Financial Economics … sales are not from market makers but rather from clients, and we find only weak evidence that … Thus, there appears to be little support for the claim that return predictability from shorts is greater …

Value investing and financial statement analysisValue investing and financial statement analysis
www.jstor.org [PDF]
… Volume 105, Issue 2, August 2012, Pages 260-278. Journal of Financial Economics … sales are not from market makers but rather from clients, and we find only weak evidence that … Thus, there appears to be little support for the claim that return predictability from shorts is greater …



Q&A About Weak Shorts


What does it mean for an asset's market value to fall?

It means that its price has decreased from what it was before.

How can you achieve a short position?

There are many ways to achieve a short position. The most fundamental method is physical selling or "short-selling". This involves borrowing assets (often securities such as shares or bonds) and selling them. The investor will later purchase the same number of the same type of securities in order to return them to the lender. If the price has fallen in the meantime, the investor will have made a profit equal to the difference. Conversely, if the price has risen then the investor will bear a loss. The borrower must usually pay a fee to borrow these securities (charged at a particular rate over time, similar to an interest payment), and reimburse any cash returns such as dividends that were due during this period of lease.

How do you know if someone is holding a weak short?

If they have tight stop-loss orders in place to cap losses on the trade if it goes against them.

Who is involved in this process?

A seller and buyer are both involved in this process; however, there are also lenders who loan out assets so that people can sell them on credit without having ownership over them yet until later on down the road when they buy back those assets with cash from their profits after selling them earlier on down the road for less than what they originally paid for them initially while still being able answer

Who are weak shorts typically?

Weak shorts are typically investors with limited financial capacity, which may preclude them from taking on too much risk on a single short position.

What is a short position?

A short position is when an investor sells something they do not own.

What does "conceptually similar" mean?

Conceptually similar means that they both employ long positions but one uses longs and one uses shorts.

Are there any differences between strong and weak longs?

Yes, strong longs tend to be more financially stable than their weaker counterparts, as well as being less likely to hold onto losing positions for longer periods of time.

What is a weak short?

A weak short is a trader or investor who holds a short position in a stock or other financial asset and will close it out at the first indication of price strength.

Why would someone want their market value to decrease?

They would want their market value to decrease because they could make more money off of it by buying back at a cheaper cost than what they sold it for originally.