Do you like low-priced stocks? Stocks with a market price under $5 are usually highly volatile because even small changes represent a larger percentage of the price. One way to trade them is by riding a period of short covering. Read more to learn about these terms.
When investors short sell a stock, they stand to profit if the share price falls. To short sell a stock, the investor must borrow the shares from someone else. Doing so implies the use of margin, or borrowing ability from the brokerage. Because of this, the investor must go through background checks, so it usually means that they are a more sophisticated investor.
When those investors begin to buy back the shares they are borrowing, short covering occurs. This could mean that the investors believe the stock has reached its lowest point, and might be on the way back up. So in general:
Short selling = bearish perspective on the stock
Short covering = bullish perspective on the stock
Business section: investing ideas
Below is a list of stocks trading from $1-$5 that have seen short covering over the past month. Do you think the short-sellers are right? (Click here to access free, interactive tools to analyze these ideas.)
1. First Bancorp
2. MGIC Investment
3. LDK Solar
4. Merge Healthcare
5. Entropic Communications
Interactive chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.