How to short a stock: 5 steps.
- Identify the stock that you want to sell short.
- Make sure that you have a margin account with your broker and the necessary permissions to open a short position in a stock.
- Enter your short order for the appropriate number of shares. When you send the order, the broker will lend you the shares and sell them on the open ...
- At some point, you'll need to close out your short position by buying back the stock that you initially sold and then returning the borrowed shares to ...
- If the price went down, then you'll pay less to replace the shares, and you keep the difference as your profit. If the price of the stock went up, ...
How to make money shorting a stock?
- Traders seeking high transparency and mobility in a stock trading program
- Those attracted to commission-free trades
- Those seeking a free version of a high-quality trading program
What is the best way to short a stock?
Short Squeeze Penny Stocks To Watch
- Harbor Custom Development Inc. (NASDAQ: HCDI) Shares of Harbor Custom Development are no stranger to big moves. ...
- Kala Pharmaceuticals Inc. (NASDAQ: KALA) Unlike Harbor, Kala Pharmaceuticals has been relatively flat this month. ...
- Vertex Energy Inc. ...
- Leap Therapeutics Inc. ...
- Katapult Holdings Inc. ...
What does it mean to 'short' a stock?
Shorting stock, also known as "short selling," involves the sale of stock that the seller does not own or has taken on loan from a broker. 1 Investors who short stock must be willing to take on the risk that their gamble might not work. Short stock trades occur because sellers believe a stock's price is headed downward.
What stocks should I short sell?
Who Are Typical Short Sellers?
- Hedge Funds. Hedge funds are one of the most active entities involved in shorting activity. ...
- Hedgers. Not to be confused with hedge funds, hedging involves taking an offsetting position in a security similar to another in order to limit the risk exposure in the initial ...
- Individuals. ...
How much money do you need to short stocks?
At all times, FINRA requires that you have at least 25 percent of the value of a shorted stock in cash in your account. For example, if you short 100 shares of stock at $20 per share and it goes up to $30, you must have at least $750 in cash in the account.
What is the easiest way to short the stock market?
This process is fairly simple:You set up a margin account with your broker.You place your order.Your broker borrows the shares.Your broker sells the shares and gives you the money.You buy back the shares at later date, when prices have dropped.
Can you short on Robinhood?
Shorting stocks on Robinhood is not possible at present, even with a Robinhood Gold membership, the premium subscriptions which allows Robinhood investors to use margin for leveraging returns. Instead, you must either use inverse ETFs or put options.
Can anyone short a stock?
You may be wondering what happens if the stock price rises and that's an important question. The seller can opt to hold a short position until the stock does fall in price, or they can close out the position at a loss.
How to short a stock: 6 steps
These instructions assume that you have a brokerage account that you can use to buy and sell stocks. If not, here is a guide on how to get one.
What short selling is and how it works
Buying a stock is also known as taking a long position. A long position becomes profitable as the stock price goes up over time, or when the stock pays a dividend.
A simple analogy for understanding short selling
It may be easier to understand short selling by considering the following analogy.
Short selling has several major risks
Short selling is incredibly risky, which is why it isn't recommended for most investors. Even professionals often lose a lot of money when shorting.
Shorting alternatives: other ways to profit from declining prices
There are several other ways to profit from falling prices that are also risky, but not quite as risky as short selling.
Only go short if you truly know what you are doing
At the end of the day, short selling is a very risky trading method that should only be done by sophisticated investors.
How Can Short Selling Make Money?
One way to make money on stocks for which the price is falling is called short selling (also known as "going short" or "shorting"). Short selling sounds like a fairly simple concept in theory—an investor borrows a stock, sells the stock, and then buys the stock back to return it to the lender.
Example of a Short Sale
For example, suppose an investor thinks that Meta Platforms, Inc. (FB), formerly Facebook, is overvalued at $325 per share and will decline in price. In that case, the investor could "borrow" 10 shares of Meta from their broker and then sell the shares for the current market price of $325.
What Are the Risks?
Short selling substantially amplifies risk. When an investor buys a stock (or goes long), they stand to lose only the money that they have invested. Thus, if the investor bought one FB share at $325, the maximum they could lose is $325 because the stock cannot drop to less than $0. In other words, the lowest value that any stock can fall to is $0.
Why Do Investors Go Short?
Short selling can serve the purposes of speculation or hedging. Speculators use short selling to capitalize on a potential decline in a specific security or across the market as a whole. Hedgers use the strategy to protect gains or mitigate losses in a security or portfolio.
When Does Short Selling Make Sense?
Short selling is not a strategy many investors use, largely because the expectation is that stocks will rise in value over time. In the long run, the stock market tends to go up, although it is occasionally punctuated by bear markets in which stocks tumble significantly.
Less Risky Alternative to Short Selling
An alternative to short selling that limits your downside exposure is to buy a put option on the same stock. Holding a put option gives the investor the right, but not the obligation, to sell the underlying stock at a stated price, called the strike price.
Costs Associated With Short Selling
Trading commissions are not the only expense involved when short selling. There are other costs, such as:
Short-term strategy
Selling short is primarily designed for short-term opportunities in stocks or other investments that you expect to decline in price.
A short trade
Let's look at a hypothetical short trade. Assume that on March 1, XYZ Company is trading at $50 per share. If a trader expects that the company and its stock will not perform well over the next several weeks, XYZ might be a short-sell candidate.
Timing is important
Short-selling opportunities occur because assets can become overvalued. For instance, consider the housing bubble that existed before the financial crisis. Housing prices became inflated, and when the bubble burst a sharp correction took place.
A tool for your strategy
Shorting can be used in a strategy that calls for identifying winners and losers within a given industry or sector. For example, a trader might choose to go long a car maker in the auto industry that they expect to take market share, and, at the same time, go short another automaker that might weaken.
Be careful
The process of shorting a stock is relatively simple, yet this is not a strategy for inexperienced traders. Only knowledgeable, practiced investors who know the potential implications should consider shorting.
A Beginner's Guide for How to Short Stocks
Joshua Kennon is an expert on investing, assets and markets, and retirement planning. He is the managing director and co-founder of Kennon-Green & Co., an asset management firm.
Why Sell Short?
Usually, you would short stock because you believe a stock's price is headed downward. The idea is that if you sell the stock today, you'll be able to buy it back at a lower price in the near future.
How Shorting Stock Works
Usually, when you short stock, you are trading shares that you do not own.
What Are the Risks of Short Selling?
When you short a stock, you expose yourself to a large financial risk.
How Is Short Selling Different From Regular Investing?
Shorting a stock has its own set of rules, which are different from regular stock investing, including a rule designed to restrict short selling from further driving down the price of a stock that has dropped more than 10% in one day, compared to the previous day's closing price. 4
Frequently Asked Questions (FAQs)
In theory, you can short a stock as long as you want. In practice, shorting a stock involves borrowing stocks from your broker, and your broker will likely charge fees until you settle your debt. Therefore, you can short a stock as long as you can afford the costs of borrowing.
Shorting a stock, explained
Shorting a stock involves making a bet and taking a debt. You bet that the stock you’re targeting will lose its value in the future. In that case, you don’t invest your money to purchase the stock and hold it. Instead, you go out and borrow the stock. People usually borrow from their brokers, and interest is charged like it is for loans.
Should you short a stock?
Shorting a stock is legal, though the SEC may apply restrictions in certain market conditions. Many famous investors you know have done it, with varying results. You can also short bonds, currencies, and other assets. Some of the most successful short-sellers of all time include George Soros, David Einhorn, and John Paulson.
Shorting a stock the right way
Hedge funds, notorious for shorting stocks, got a shock in 2021 when they bet against GameStop and AMC Entertainment e stocks. They took their bets too far and became vulnerable to the dreaded short squeeze.
Risks
- It's possible to make money when prices are going downif you are willing to accept the risks. The primary risk of shorting a stock is that it will actually increase in value, resulting in a loss. The potential price appreciation of a stock is theoretically unlimited and, therefore, there is no limit to the potential loss of a short position. In addition, shorting involves margin. This can lead to the p…
Significance
- The uptick rule is another restriction to short selling. This rule is designed to stop short selling from further driving down the price of a stock that has dropped more than 10% in one trading day.2 Traders should know these types of limitations could impact their strategy.
Example
- Let's look at a hypothetical short trade. Assume that on March 1, XYZ Company is trading at $50 per share. If a trader expects that the company and its stock will not perform well over the next several weeks, XYZ might be a short-sell candidate. To capitalize on this expectation, the trader would enter a short-sell order in their brokerage account....
Causes
- Short-selling opportunities occur because assets can become overvalued. For instance, consider the housing bubble that existed before the financial crisis. Housing prices became inflated, and when the bubble burst a sharp correction took place.
Variations
- In terms of how long to stay in a short position, traders may enter and exit a short sale on the same day, or they might remain in the position for several days or weeks, depending on the strategy and how the security is performing. Because timing is particularly crucial to short selling, as well as the potential impact of tax treatment, this is a strategy that requires experience and at…
Prevention
- Even if you check the market frequently, you may want to consider placing limit orders, trailing stops, and other trading orders on your short sale to limit risk exposure or automatically lock in profits at a certain level.
Usage
- Shorting can be used in a strategy that calls for identifying winners and losers within a given industry or sector. For example, a trader might choose to go long a car maker in the auto industry that they expect to take market share, and, at the same time, go short another automaker that might weaken.