Here’s a step-by-step guide for how to short a stock:
- Set up a margin account with your broker. Short selling requires the use of a margin account, which allows you to borrow...
- Research short-sale candidates. Once you have clearance from your broker to short a stock, you’ll need to identify an...
- Make a plan for the short-sale trade. Before executing any aspect of the...
What does it mean to 'short' a stock?
Mar 30, 2020 · These are the six steps to sell a stock short: Log into your brokerage account or trading software. Select the ticker symbol of the stock you want to bet against. Enter a regular sell order to initiate the short position, and your broker will …
How to short stocks for beginners?
Mar 13, 2022 · 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 …
What are ways to short a stock?
Nov 30, 2021 · How to short stocks Short-term strategy. Selling short is primarily designed for short-term opportunities in stocks or other investments... A short trade. Let's look at a hypothetical short trade. Assume that on March 1, XYZ Company is trading at $50 per share. Timing is important. Short-selling ...
When to short a stock?
How to short a stock As we already mentioned, you will need a margin account. The process for obtaining one varies from one brokerage to... You will have to have either stock equity or cash in your margin account that will serve as collateral to make any trade. If you fulfill these requirements, you ...
How much money do you need to short a stock?
Can anyone short sell a stock?
How long can you hold a short position?
What happens if you short a stock and it goes to zero?
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.
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.
What Is Shorting a Stock?
Short selling amounts to betting that a given stock will decline in value - in Wall Street lingo, that's called having a "short" possession. Having a "long" possession means you actually own the stock, and are betting that it will rise in value.
Why Would You Short a Stock?
The fact is, the investors most likely to short a stock are deep-pocketed ones - think pension funds, stock brokerage firms, hedge funds, and other institutional investors. They may be speculating about a stock, but it's just as likely they'll short a stock for other, more defensive-minded reasons from a portfolio management point of view.
How to Short a Stock in Five Steps
Although the myriad moving parts involved in a short sale make the process risky, the actual steps needed to execute a complete short sale are fairly direct. Here's how to get the job done:
The Aftermath of a Short Stock Deal
The good news, in theory, is that it doesn't take too long to figure out if you're going to make a profit on a short sale.
Buyer Beware
In a unique way, a short sale amounts to the old retail warning about "buyer beware."
What is shorting a stock, and why would you do it?
Shorting a stock involves borrowing shares from someone who owns the stock you want to sell short. Once you borrow the shares, you then sell them on the open market, getting cash from whoever buys the shares from you. At some point in the future, you'll buy back the stock and then return the shares to the investor from whom you borrowed them.
How do you short a stock?
In order to use a short selling strategy, you have to go through a step-by-step process:
A simple example of a short selling transaction
Here's how short selling can work in practice: Say that you've identified a stock that currently trades at $100 per share. You think that stock is overvalued, and you believe that its stock price is likely to fall in the near future. Accordingly, you decide that you want to sell 100 shares of the stock short.
What are the pros and cons of shorting a stock?
Short selling has pros and cons compared to regular investing in stocks. The biggest advantage of short selling is that it lets you profit from a decline in the value of an investment .
What types of investors are best suited for shorting?
Because of the potentially unlimited losses associated with short selling, an investor has to have a higher tolerance for risk in order to be successful at shorting stocks.
What are the risks of shorting a stock?
The biggest risk involved with short selling is that if the stock price rises dramatically, you might have difficulty covering the losses involved.
What costs are involved with short selling?
Even when things go well with shorting a stock, there are still costs involved. They include the following: