When an investor shorts a share, they are betting on the share price declining. In the same way an investor profits from a share price rising, a short seller will profit if the share price declines.

They accomplish this by borrowing shares to sell on market in the hope of buying them back at a cheaper price in the future. Whilst it can be a great investment strategy, it is also a high risk one with theoretically unlimited losses.

Because of the risks short sellers are only likely to take a short position if they have a high conviction that the shares shorted are going to fall. As a result I believe regular investors should consider carefully the risks of owning heavily shorted shares.

According to data provided by ASIC, here are the 10 most shorted shares on the ASX as of 12 September 2016:

  1. Worleyparsons Limited (ASX: WOR) – 16.3% of this engineering company’s shares are currently held short. This was an increase from 15.2% this time last week.
  2. Myer Holdings Ltd (ASX: MYR) – 15.5% of the embattled retailer’s shares have unsurprisingly been shorted. Myer’s full year results last week haven’t changed my view that this is a share to avoid.
  3. Metcash Limited (ASX: MTS) – 12.3% of the shares of this wholesaler and distributor are being held short currently. Short interest increased from last week, when it stood at 10.8%.
  4. Western Areas Ltd (ASX: WSA) – 12% of the nickel producer’s shares have been shorted, up from 10.3% last week. A fall in nickel prices over the last couple of years is largely to blame for the market’s bearish view.
  5. Monadelphous Group Limited (ASX: MND) – 10.8% of the mining services company’s shares are held short. Despite the company being one of the most shorted shares on the ASX all year, it has managed to carve out a 27% return for shareholders.
  6. Flight Centre Travel Group Ltd (ASX: FLT) – 10.7% of the travel agency’s shares have been shorted. Short interest has been waning in the last few weeks which could potentially indicate a change of fortunes coming.
  7. Bellamy’s Australia Ltd (ASX: BAL) – 10.5% of the organic infant formula producer’s shares have been shorted. Short interest has been rising in the last few weeks, possibly due to concerns over Chinese regulation changes.
  8. Cover-More Group Ltd (ASX: CVO) – 10% of this travel insurer’s shares are held short, up from 9% last week. Despite Cover-More’s shares being down 35% this year, short sellers clearly think there is further to go.
  9. Alumina Limited (ASX: AWC) – 9.4% of its shares are held short. Alumina’s short interest continues to remain steady despite recently settling its dispute with US mining giant Alcoa.
  10. Nextdc Ltd (ASX: NXT) – 9.1% of the shares of this data centre-as-a-service company are being held short. With a price-to-earnings ratio of 537, it would appear as though short sellers think its shares have got too expensive.

Although I don't necessarily think you should sell all of the above shares if they're in your portfolio, some shares such as Myer and Western Areas might be best swapped out. These three fantastic shares would be great replacements if you ask me.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia owns shares of Bellamy's Australia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.