Short sellers expect price appreciation to be limited. They make a bet that the price of the stock will go down after they sell it short. The toughest call for a short seller or an investor, even in a bull market, is the decision of when to sell since it is perceived as risky and speculative. Selling short is criticized as an investment alternative. The reason behind this criticism is that although the stock can go to zero and provide a nice profit, it can also go up to infinity and the losses that can occur are terrifying. However, short sellers respond to this criticism by stating that the chances for a stock to g

Short sellers encounter boundaries when using this form of investment. Restrictions such as institutional prohibitions, transaction costs and borrowable shares exist on short selling since stocks do not trade at only one efficient price, but within a band of prices. Therefore, portfolio managers know to look for mispriced stocks since there exists more overpriced stock than underpriced. There is also a high correlation between stock prices and high short interest. This indicates that stock prices reflect positive information more efficiently than negative information. As a result, short-interest ratios have proven to be bearish. A sudden negative-earnings surprise affects stock prices at a greater degree than what a positive-earnings surprise. The price of a stock will go down at a greater degree when earnings expectations are not met than what would occur to the stock price if the earnings exceed that anticipated amount. Another opportunity that exists for short sellers to practice their strategies is when bubbles form and collapse. Many studies have been conducted as an attempt to discover why prices vary from their intrinsic value. A suggestion that has been made to this theory is that fads linger in the security market because institutional investors are too averse to risk and aware of short-term relative performance to bet against the fad and sell. Bias that exists in the markets also allows disparities of prices to remain. Brokerage houses are one of the sources that greatly contribute to this bias. Brokerage houses recommend stock from a buy to a hold and only very few are willing to actually make a sell recommend

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