Excerpts from: http://theotcinvestor.com/how-to-short-sell-p...1/
Short sellers are simply looking for stocks that are overvalued and betting on their decline. Since the losses are unlimited and profits are limited , it is very important for short sellers to carefully research their prospects and be sure that things are bad. Moreover, it is important to be wary of penny stock promoters that may be trading against short positions and bidding up the prices of the stocks. However, there are many ways to profitably short penny stocks.
Here are a few tips to get started:
- Only short penny stocks that are $0.25 or higher (due to margin requirements and the likelihood of manipulation).
- Carefully watch past price ranges to determine your expected margin requirements.
- Watch for stocks that go up on fluff news or press and wait for the day when it tops out.
- Watch level II quote screens to identify where market makers are placing the floors.
Risks of Shorting Penny Stocks
Brokers require investors to put up collateral to guarantee against potential losses in the form of margin requirements. Often times, brokers will require OTC investors to have $2.50 of margin per share to short a stock under $2.50, which can make shorting penny stocks very costly. For example, if an investor shorted 2,000 shares of a stock at $0.50, you have to have $5,000 in your account. All along, the maximum profit for this position would only be $1,000, if the stock went to zero.