7 Easy Steps to Shorting Stocks
We both know about buying and selling stocks. That’s easy.
But yesterday I told you about another way to trade: short selling.
I gave you an overview about what short selling is, and whether or not it’s something you might want to try.
Today, I’ve broken the “how to” for shorting stocks into seven steps. And at the end, I’ve thrown in some tips to help you get started.
How to Short a Stock
I personally like using TD Ameritrade because you can learn how to short a stock through practice.
So, I’ll give you a rundown on how to short a stock on TD Ameritrade as an example.
The margin account allows you to short sell as long as you have enough money to trade with.
1. Enable Your Account for Margin Trading
Just simply opening an account with TD Ameritrade doesn’t mean you’re able to short sell. You have to go into your account options to enable this feature.
Then, TD Ameritrade will provide you with documentation and a form to sign showing that you acknowledge the risks of short selling.
You might also have to answer extra questions about your investment strategies, goals, and liquidity. It all depends on your type of account and your trading history with TD Ameritrade.
2. Enter Your Order to Sell Short
Once you’ve enabled your account for margin, you can enter an order to short sell a stock. It works the same as it would on any other platform.
You have to specify that you’re planning to short this particular stock.
3. Account Minimum
You must have a minimum of $2,000 dollars available to trade with or short within a TD Ameritrade margin account.
This requirement protects the broker in case your short sale goes in the wrong direction and you have to cover your losses.
4. Stocks That Can’t Be Traded By TDA
You can short sell just about any stocks through TD Ameritrade except for penny stocks.
5. How Long It Takes to Enable Your Account for Short Sales
When you initially fund your account and enable margin trading, you will have to wait three business days before you can short sell.
During that time, TDA might ask you for more information. They’re reviewing your account to make sure it qualifies for shorting a stock.
6. You Can’t Reserve Shares To Short
I often use my trading accounts to reserve shares for shorting later.
TD Ameritrade doesn’t offer that option. If you put in a short sale order and no shares exist, the transaction simply won’t go through.
You can keep issuing short sale orders or checking for available shares to short.
7. TD Ameritrade Short Selling Fees
Currently, the margin fees for TD Ameritrade are between 6.25 and 9% with a base rate of 7.75%. TDA’s stock commission is a flat $9.99.
How Do You Short a Stock on E-Trade or Robinhood?
The process of shorting a stock on E-Trade is pretty much the same as shorting shares on TD Ameritrade. You have to enable your account for margin, and E-Trade must be able to find the shares you wish to short.
Robinhood, meanwhile, doesn’t allow you to short a stock.
It’s a free trading platform with lots of limitations, as you can imagine, so you don’t want a Robinhood trading account if your intention is to learn how to short a stock.
Tips on How to Short a Stock
Learning how to short a stock takes time, but you can potentially shorten the learning curve by paying attention to the pros.
Let’s look at some of the key factors to keep in mind when shorting stocks with TD Ameritrade and other brokers.
1. Timing Is Important
This is true of all stock market activity, but it applies even more specifically to shorting stocks.
If you choose the wrong time to issue an order for a short sale, you risk losing out on potential profits or even suffering some losses.
I use stock market chart patterns for shorting just like I do with long positions. I also look for so-called “pump and dump” schemes that might allow me to profit from the downside after a pumped-up stock crashes.
2. A Tool For Your Strategy
You can also benefit from trading tools that combine trading information in one place.
For instance, you can use a trading tool to paper trade until you’re comfortable with short selling. It’s a great way to learn without putting your money on the line.
3. Be Careful
Shorting stocks comes with risks. So does going long.
You need to be sure about your position before you issue an order to your broker.
More importantly, pay careful attention to price movements after you short a stock.
If it starts to go in the wrong direction, cut your losses immediately. Don’t let your short position turn into a huge drain on your trading account.
Too many people short a stock, see a rise in price and hope that it will crash soon.
That can happen, but you don’t want to bet on it. Maybe you haven’t heard about a recent announcement from the company that has risen its stock price for the foreseeable future. In that case, you’ll just continue to collect losses.
4. Learn With Pros
There are plenty of ways to gather knowledge about how to short a stock.
Try googling some trading platforms.
There are communities that share trades with one another, give each other advice, and comment on one another’s decision.
The Bottom Line
Learning how to short a stock can help make you a more prolific and profitable trader.
I do it all the time because I know I can make money from it.
Of course, we all lose every now and again. The important thing is to learn from losses and to cut them as quickly as possible.
— Tim Sykes
Editor, Penny Stock Millionaires