Successful investing depends upon proper identification of overpriced stocks and rightly priced stocks. However, the fairly priced stocks and the overhyped toxic stocks are mingled in the marketplace in such a way that it becomes very difficult to distinguish them. Investors who can accurately figure out the toxic stocks and cast them aside at the right time are likely to benefit.
Usually, toxic stocks are susceptible to outside shocks and are burdened with high levels of debt. Also, price of the toxic stocks is unjustifiably high. The irrationally inflated price of the toxic stocks is only short-lived as the inherent value of these stocks is lower than the current bloated price.
The higher price of toxic stocks is either due to an irrational exuberance associated with them or some serious fundamental lacunae in the stock. Owning such stocks for a longer period of time may result in huge loss of wealth.
On the other hand, investors may gain from the accurate identification of toxic stocks with the help of an investing strategy called short selling. This strategy allows you to sell a stock first and then buy it when the price falls.
While short selling excels in bear markets, it typically loses money in bull markets.
So, identifying toxic stocks and discarding them at the right time is the key to shield your portfolio from big losses. Profits can be made by short selling them.