- Short selling is a way to benefit from stocks when they are declining.
- However, it must be noted here that if the predictions go wrong and the stock increases in value, short selling can incur a loss as well.
- Short selling is a less-travelled route for investors.
Canadian equity markets can be a great place to invest for pro as well as amateur investors, with an assortment of stocks and ETFs to choose from.
While exploring their investment options, investors more commonly come across pointers such as diversification of portfolios, research of penny stocks, etc. However, there is a chance that traders may find terms like short selling and wonder exactly how it impacts their options.
With that in mind, let’s look into short selling and cover a few shorted stocks in Canada.
What is short selling?
Short selling is a way to benefit from stocks when they are declining. Under this method, an investor ideally borrows some shares and sells them immediately after based on projections that the stock price will decline. Then, to return the shares to the lender, the short seller repurchases them at a now-discounted rate.
Let us look at an example:
Short seller ‘A’ borrows 10 shares at C$ 50 apiece from Trader ‘B’ and sells them immediately after at the same price, i.e., for C$ 500 in total. When the price declines to C$ 40 apiece, ‘A’ buys back 10 shares for C$ 400 and returns it the lender for the original buying price of C$ 500, hence, pocketing a profit of C$ 100.
However, it must be noted here that if the predictions go wrong and the stock increases in value, short selling can incur a loss as well.
Most Shorted stocks in Canada
- Manulife Financial Corporation (TSX:MFC)
Manulife is a provider of financial services like life insurance and wealth management. At market close on Friday, July 16, MFC stocks dipped by 0.7 per cent to close at C$ 23.98 apiece.
Investors might be short selling this stock as the financial sector seems to be on a bearish mode at the moment. Generally, investors indulge in short selling when the market is bearish to book profits from the downward trend.
The S&P/TSX Capped Financial index declined by 0.8 per cent quarter-to-date (QTD). MFC stocks, on the other hand, declined by 11 per cent in the last three months and fell 2.5 per cent in the last 30 days.
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- Toronto-Dominion Bank (TSX:TD)
Another stock from the financial services is the Toronto-Dominion Bank. TD stock has dipped by four per cent in the last one month. The prices could go down further amid the lack of certainty about a dividend rise for big six banks in the coming quarter.
TD stock’s last closing price on July 16 was 5.7 per cent lower than its 52-week high of C$ 89.12 (May 27, 2021).
- Sun Life Financial Inc. (TSX:SLF)
Investors could be short selling Sun Life Financial stock as the economic outlook of the Canadian insurance industry remains bleak as compared to the pre-pandemic period.
According to research firm GlobalData, the Canadian insurance industry is likely to note a compound annual growth rate of 1.7 per cent till 2024. This figure is down from the pre-pandemic estimates of 4.1 per cent.
SLF stock has fallen by about three per cent in the last three months, and the prices could go down further. The shares were priced at C$ 63.96 apiece on July 16.
- Westshore Terminals Investment Corporation (TSX:WTE)
After surging by four per cent in the last six months, Westshore Terminals stock seems to be on a downward trajectory.
It declined by 10 per cent in the last one month and dipped by about 16 per cent in the past three months.
The coal storage company’s stock price could decline further as more countries committed to the goals of reducing greenhouse gases emission.
The last closing price of WTE shares was C$ 16.75 per unit on July 16.
- West Fraser Timber Co. Ltd. (TSX:WFG)
Softwood lumber company West Fraser Timber saw its stocks decline by 3.5 per cent on July 16 to close at C$ 85.85.
After a surge of about five per cent year-to-date (YTD), WFG shares have been falling, which could be due to the decline in the overall market. The S&P/TSX Materials Index, which tracks West Fraser Timber, has dipped by about two per cent YTD.
WFG stock declined by 19 per cent in the last three months and fell eight per cent in the past week. It has also dropped by 22.5 per cent from its 52-week high of C$ 110.81 apiece.
- Canadian National Railway Company (TSX:CNR)
Canadian National Railway stocks declined by about 11 percent in the last nine months.
The company is expected to release its second quarter financials this month, which could reflect a negative impact as the third wave of the coronavirus pandemic had disrupted business operations across sectors in Q2 2021.
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- First Majestic Silver Corp. (TSX:FR)
The Vancouver-based mining company’s stock has declined by nearly 50 per cent from its 52-week high of C$ 30.75 apiece (February 1, 2021).
As uncertainty is expected to loom over the precious metals sector, First Majestic Silver’s stock price could fall further.
FR share has dipped by 25 per cent in the last one month, closing at C$ 16.35 on July 16.
- Canadian Natural Resources Limited (TSX:CNQ)
Since the beginning of this year, CNQ share returned 46.7 per cent. However, it has declined by 1.4 percent in the last one week, closing at C$ 44.89 on July 16.
One primary reason behind the share price dip could be the decline in the energy sector. The S&P/TSX Capped Energy Index has declined by 10.3 per cent QTD, which might be why prices of oil and gas stocks are falling.
With oil prices being hammered in the wake of the OPEC’s decision to boost monthly supply, energy stocks could be impacted further.