How do you short a stock?
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i think you can do it with most accounts. i had a cash account on etrade and the option to short was always there, but i never did it.
Nope, you need a margined account 
Whether you use trade past your real $$ and use margin is another story but you do indeed need a margin account to short an equity.
Hmm... ATOT people shorting? Didn't realize people had such interest in trading equities here beyond myself
Whether you use trade past your real $$ and use margin is another story but you do indeed need a margin account to short an equity.
Hmm... ATOT people shorting? Didn't realize people had such interest in trading equities here beyond myself
was down 80%, but stock rebounded back too bad we ran outta money (didn't ask parents for some) cuz our philosophy was to buy long, no shorting. So ever since christmas, we kept buying this stock...we bought more when it kept falling until we ran outta money...WAS suppose to invest another 2k and buy at $10, but noooooooooooooooooo, after one week, it jumps back to $25!
o yeah, nvda is scorching hot! sheesh, that stock to hot to handle
Static911
too bad we ran outta money (didn't ask parents for some) cuz our philosophy was to buy long, no shorting. So ever since christmas, we kept buying this stock...we bought more when it kept falling until we ran outta money...WAS suppose to invest another 2k and buy at $10, but noooooooooooooooooo, after one week, it jumps back to $25!o yeah, nvda is scorching hot! sheesh, that stock to hot to handle
Static911
<< So ever since christmas, we kept buying this stock...we bought more when it kept falling until we ran outta money...WAS suppose to invest another 2k and buy at $10 >>
Averaging down... hee hee
I love it!
I'm 100% sure that you need a margin account. Stonerdave is mistaken (or eTrade has a defective web page that allowed him to place a short order using a cash account).
yeah, they're right...for some odd reason i have that little box to short but it says you need a margin account to go through with it. so i lied!
okay, i've got a hypothetical question...say you short a nasdaq stock and it it goes down. in fact, it flat out bombs. what happens if you still have the stock when it goes under a dollar for a while and gets delisted?
I would think you would cover your short by that time.
One other fact about shorting, you can't short a stock under $5.
One other fact about shorting, you can't short a stock under $5.
well, if you shorted a stock which goes to zero, you should be very very happy. Remember, shorting a stock is borrowing a stock and selling it. So at some point you need to buy back the stock to repay. But if the stock is now worthless, well, it doesn't cost you anything to buy it back so you've made a lot of profit.
glenn1
Lifer
- Sep 6, 2000
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Those saying you need a margin account to short equities are correct. (in technical terms, margin requires a "hypothecation agreement", which is what you're signing when you set up a margin account).
I don't know how much detail you want me to give on how a short trade works, so let me give you the basic scenarios of how you would go about putting your position on, and closing it out.
The simplest way you can get short is to place a round lot (multiples of 100 shares) market sell short order. Say you want to short 100 shares of Microsoft. The order to the exchange will go out as follows, "Sell 100 shares short MSFT market." and once your order reaches the floor specialist on the exchange (or your trade negotiated through an electronic OTC market, such as the Nasdaq), it will eventually get executed, and you'll get an execution price. If you place a market order for an odd-lot, same thing happens, but your B-D (broker-dealer) will charge you 1/8 per share traded for executing the trade for you - it doesn't effect your execution price, just gets added to your bill.
Alternatively, if you don't want to place a market order, you can specify your trade as a "sell limit short," so in this case, your order would get placed as "sell stop limit 100 shares MSFT short @ 50." If you do it this way, the following has to happen: MSFT shares must drop to 50 or below. Until and unless that happens, your order will never execute. That removes the stop from your order ('elects' your order, also known as triggering or activating), and makes it into a limit @ 50. MSFT then must go back above 50, and stay there for long enough for your order to execute.
IMPORTANT NOTE: Short sales can only be executed on an uptick or "zero-plus" tick! That means that the last trade which was not at the same price must have been higher than prior trades. For example, if during trading, MSFT shares change hands at the following prices: 55, 54, 53, 50, 46, then you will NOT be allowed to sell short. Now, if the following trades take place: 55, 54, 53, 50, 51, 51, 51, 51, then you can. The trade of 51 following 50 is an uptick, the subsequent trades at 51 are "zero-plus" ticks (a trade at the same price following an uptick trade is a zero-plus tick).
Okay, now you have secured your short position. Let's say you got an execution at 50 on those 100 MSFT shares. Two things happen at this point. First, you receive a "credit" in your margin account for the proceeds of the trade, in your case, [$50 x 100 shares] - [trade commisions] = proceeds. Let's say for ease of our math that the proceeds were $5,000. This gets listed as an "open credit" in your margin account. This is not money you can use however! Until you close out your short position, this is simply paper money. The money from the short sale does not become 'yours' until you close out your short position, i.e. buy the shares to close your short position.
In addition, remember how when we said that selling short requires a margin account? Well, here's where that comes into play. Even though you have 'sold' the position and have a credit for $5,000 in your margin account, that's not really your money. In order to show good faith that you can close out your short, you have to meet margin maintainence requirements as outlined in Securities Regulation T. The minimum margin maintence requirement for a short sale is $5/share or 30% of the share price, whichever is greater. Therefore, for your $5000 sale, you'll have to come up with $1,500 upfront.
The minimum total credit balance you can hold as well is $2,500, so if the total of your short sale proceeds and the required maintainence of $5/share or 30% is less than that, you'll need to put up the additional money as cash. In the case of our example, the credit balance is above that, so no worries for now. In additon, we have to maintain the minimum maintainence requirement of 30% of CMV (Current Market Value) of the shorted equity as well. If that threshold isn't maintained, a margin call will be issued, and you'll have to put up more money to keep your position from being sold out to settle the call.
The credit balance will remain as $6,500 (unless you're forced to add funds in response to a margin call) until you close your short position. Again, this is mostly "theoretical" money. Even though it's listed as a 'credit,' it's not money you can use. The credit balance doesn't become 'yours' until you close the position. And to close a short position requires purchasing the shares you shorted, and hopefully for a lower price.
In our examples case, let's say that your decision to short MSFT was a wise one. You shorted it at 50, it's now at 40. You call your broker again, and tell him to 'cover' the short (buy the shares to close out your position). You get your buy execution at 40, for net cost (less commissions again) of $4,000. Subtract the cost for your cover for your credit balance from your margin account short balance (in our case 5,000 - 4,000) and you get your profit/loss. If you show a profit, the surplus credit gets released to your control. If you show a loss, your broker will likely politely ask you to send along a check.
And so it goes.... the secret life of the short sale... any questions?
I don't know how much detail you want me to give on how a short trade works, so let me give you the basic scenarios of how you would go about putting your position on, and closing it out.
The simplest way you can get short is to place a round lot (multiples of 100 shares) market sell short order. Say you want to short 100 shares of Microsoft. The order to the exchange will go out as follows, "Sell 100 shares short MSFT market." and once your order reaches the floor specialist on the exchange (or your trade negotiated through an electronic OTC market, such as the Nasdaq), it will eventually get executed, and you'll get an execution price. If you place a market order for an odd-lot, same thing happens, but your B-D (broker-dealer) will charge you 1/8 per share traded for executing the trade for you - it doesn't effect your execution price, just gets added to your bill.
Alternatively, if you don't want to place a market order, you can specify your trade as a "sell limit short," so in this case, your order would get placed as "sell stop limit 100 shares MSFT short @ 50." If you do it this way, the following has to happen: MSFT shares must drop to 50 or below. Until and unless that happens, your order will never execute. That removes the stop from your order ('elects' your order, also known as triggering or activating), and makes it into a limit @ 50. MSFT then must go back above 50, and stay there for long enough for your order to execute.
IMPORTANT NOTE: Short sales can only be executed on an uptick or "zero-plus" tick! That means that the last trade which was not at the same price must have been higher than prior trades. For example, if during trading, MSFT shares change hands at the following prices: 55, 54, 53, 50, 46, then you will NOT be allowed to sell short. Now, if the following trades take place: 55, 54, 53, 50, 51, 51, 51, 51, then you can. The trade of 51 following 50 is an uptick, the subsequent trades at 51 are "zero-plus" ticks (a trade at the same price following an uptick trade is a zero-plus tick).
Okay, now you have secured your short position. Let's say you got an execution at 50 on those 100 MSFT shares. Two things happen at this point. First, you receive a "credit" in your margin account for the proceeds of the trade, in your case, [$50 x 100 shares] - [trade commisions] = proceeds. Let's say for ease of our math that the proceeds were $5,000. This gets listed as an "open credit" in your margin account. This is not money you can use however! Until you close out your short position, this is simply paper money. The money from the short sale does not become 'yours' until you close out your short position, i.e. buy the shares to close your short position.
In addition, remember how when we said that selling short requires a margin account? Well, here's where that comes into play. Even though you have 'sold' the position and have a credit for $5,000 in your margin account, that's not really your money. In order to show good faith that you can close out your short, you have to meet margin maintainence requirements as outlined in Securities Regulation T. The minimum margin maintence requirement for a short sale is $5/share or 30% of the share price, whichever is greater. Therefore, for your $5000 sale, you'll have to come up with $1,500 upfront.
The minimum total credit balance you can hold as well is $2,500, so if the total of your short sale proceeds and the required maintainence of $5/share or 30% is less than that, you'll need to put up the additional money as cash. In the case of our example, the credit balance is above that, so no worries for now. In additon, we have to maintain the minimum maintainence requirement of 30% of CMV (Current Market Value) of the shorted equity as well. If that threshold isn't maintained, a margin call will be issued, and you'll have to put up more money to keep your position from being sold out to settle the call.
The credit balance will remain as $6,500 (unless you're forced to add funds in response to a margin call) until you close your short position. Again, this is mostly "theoretical" money. Even though it's listed as a 'credit,' it's not money you can use. The credit balance doesn't become 'yours' until you close the position. And to close a short position requires purchasing the shares you shorted, and hopefully for a lower price.
In our examples case, let's say that your decision to short MSFT was a wise one. You shorted it at 50, it's now at 40. You call your broker again, and tell him to 'cover' the short (buy the shares to close out your position). You get your buy execution at 40, for net cost (less commissions again) of $4,000. Subtract the cost for your cover for your credit balance from your margin account short balance (in our case 5,000 - 4,000) and you get your profit/loss. If you show a profit, the surplus credit gets released to your control. If you show a loss, your broker will likely politely ask you to send along a check.
And so it goes.... the secret life of the short sale... any questions?
glenn1
Lifer
- Sep 6, 2000
- 25,383
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<< One other fact about shorting, you can't short a stock under $5. >>
Incorrect. You CAN short a stock under $5, although your particular broker may not allow you to. The reason why many brokers don't, is because the margin maintence requirements are fairly steep.
The margin maintence requirement rules for shorting low-priced securities (called appropriately the "cheap stock rule"
are as follows: Stock price: Minimum Equity to be maintained
$2.50 or under $2.50/share
$2.51 - $5.00 100% of share price
Above $5 $5 per share (or 30% if greater)
So, if you have enough money to backstop your short, and your broker allows it, you CAN short a stock under $5.
the master glenn1 has spoken once again
my prof who works at the dallas fed reserve told me his group lobbied for a total of 100pt basis cut which they got (50 point cut at the meeting and another 50 point between the meetings).
STatic911
my prof who works at the dallas fed reserve told me his group lobbied for a total of 100pt basis cut which they got (50 point cut at the meeting and another 50 point between the meetings).
STatic911
Glenn1, strange, all the brokers I deal with don't allow us to short $5 stocks. I know friends at larger hedge funds that are allowed to but they tend to have special arrangements with their brokers because they deal in the $10's of millions per trade.
glenn1
Lifer
- Sep 6, 2000
- 25,383
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Yep, any given B-D doesn't have to allow you to short a low priced stock, but it can be done. The fact that most won't allow it doesn't mena you can't. The simple reason why most don't allow it is pretty simple... say you want to short a penny stock, and let's say that the stock is trading at ten cents. To short ten thousand shares, or $1,000 worth of the stock, you'll have to maintain a credit balance of $25,000 on your margin account to cover the maintenence requirement on the short to comply with SRO and Reg T rules. Most folks wouldn't be willing to front $25,000 for an investment with a maximum payoff of $1,000 and theoretically unlimited loss potential.
Most people's pockets just aren't that deep, so most B-D's won't even allow it. So in theory you can, but as you pointed out, the reality of it is that essentially you can't short a stock under $5.
Most people's pockets just aren't that deep, so most B-D's won't even allow it. So in theory you can, but as you pointed out, the reality of it is that essentially you can't short a stock under $5.
thanks for the info, i was wondering what happened with the dot-com fallout like etoys & buy.com.
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