Short sales are transactions where shares sold and have already been borrowed from agents. The shorter pay interest on the value of the shares and must return the stock at a later stage he borrowed.
A shorter is expecting that the cost will go down so when the purchases the shares back he may have to pay less for them afterward what they were sold by him for. He gains from the cost that he buys them back to return them to the broker and sold them and when the borrowed in the difference in cost. By participating in this type of trade a shorter takes on big danger. He may have to pay twice as much for the shares that he borrowed if the cost doubles. There’s no better instance of this than in the early dot com days crash around 2001. Many, many investors lost money by shorting penny stocks to watch that continued to increase despite the fact they’d little to no sales or gains in cost.
Because of the high risk that a shorter takes, he must be convinced that the stock will go down. And usually, a shorter does a lot of research and is experienced. When you see that a penny stock has been shorted, you should ask yourself why. The shorter must have a powerful reason for shorting the stock. The only reason you’d put money into a penny stocks to watch that has been shorted is because you understand the rationale you disagree with the rationale and that it’s anticipated to fall. Should youn’t understand the motive, then sense would tell you to stay away. A shorter might understand something like the company is getting prepared to default on a loan… or declare a loss of a major account that would lead to a decrease in sales.