Brokerage Firms Offering Shorting Stocks. Short Selling Trading Commissions.

Which online broker accounts offer short selling stocks? Short trading commissions. Best discount brokerage firms for shorting stocks, penny stocks, and ETF's in 2019.

Overview of Shorting Stocks

Buying a company in hopes that its stock price goes up is how most traders play the equity market. But this strategy isn’t the only way to make money. There’s a technique called shorting that allows you to profit whenever the market turns south. Once you learn this strategy, it won’t matter anymore whether the stock market goes up or down, because you’ll win in either direction.

What is a Short Position?

Whenever you buy a stock hoping that the price goes up, you are long the stock. It’s a bullish position. But let’s say you find a company whose stock price is really high—so high in fact that you think it’s overpriced and is headed for a downturn. In this case, you can take the opposite position. If you do this, you will make money if the price goes down (not up), and you will lose money if the stock goes up.

Online Brokers That Offer Shorting Stocks and ETF's

Shorting Requires a Margin Account

When you short a stock, what happens in the background is that you first borrow shares of a stock from another customer at the broker, and then you immediately sell the shares on the open market.

Borrowing anything is a type of loan, which means that you must have a margin account. When you apply for margin privileges, you must submit a credit application to the brokerage firm.

The government requires a $2,000 minimum account balance to have margin privileges. Because someday you’ll have to purchase the same stock to cover your short position, you must demonstrate up front that you have the ability to do so. Both the broker and the government have regulations that stipulate how much you can short as a percentage of your account value.

The government’s policy is stipulated in Regulation T, known more commonly as Reg T. This rule requires investors to have at least 50% of a short sale’s value in other account assets before the stock is shorted. Brokerage houses can increase this requirement.

Once you have an open short position, you’ll be rooting for the price to go down. If it goes up and you don’t have any cash in your account, your margin account will be charged daily interest.

Example of a Short Position

Suppose you looked at IBM’s financial statements and decided the stock is overvalued and headed for a pull back. You want to sell short 100 shares. Since you are bearish on the stock, you want to enter the trade by selling first. Yes, you can actually do this.

A shorted stock will appear in your account tagged as a short position. If the price goes down, as you want, the broker will not charge any interest. But if you guessed wrong, and the price goes up, the broker might charge margin on the difference in price.

For example, say that you sold 100 shares of IBM at $30. That’s a $3,000 transaction. But the stock moves against you and is now trading at $40. You’re $1,000 in the hole. Your broker will charge interest on the $1,000. If the stock price moves to $50 tomorrow, the broker will charge daily interest on the $2,000 balance. And so on.

As an example, Scottrade’s margin rate for a loan under $10,000 right now is 8.25%. A $2,000 loan at this rate costs about 45¢ per day. The higher the stock moves, the more margin interest you will have to pay.

Most brokerage houses will use your account’s cash balance to cover the difference in price if the shorted stock moves against you. For example, if the price difference is $2,000 and there is $2,400 of cash sitting in your core account, you won’t have to pay margin interest.

Exiting the Short Position

If you think the stock’s price has dropped as far as it’s going to, or if you simply predicted wrong, it’s time to exit the position. To do this, you “Buy to Cover”. This is a buy order that will purchase shares of the stock and return them to the trader you borrowed from.

Why Shorting is Important

Shorting stocks is important because markets or individual equities can be overbought, which will make their prices too high compared to intrinsic value. Shorting brings prices back to reality, so the practice helps to keep securities markets in check and prevent bubbles.

Because prices inevitably experience declines, shorting is a reasonable method to make profits in the equity markets. An old saying is, “Bulls makes money, bears make money, and pigs gets slaughtered”. Pigs are investors who don’t know what they’re doing.

Hazards of Bearish Strategies

Keep in mind that the general tendency of equity markets is up. The S&P 500, for example, has averaged 8% per year over its lifetime. Market declines are usually temporary. Investing as a bear is to go against the flow of financial markets.

If you’re a bull, the most you can lose is the amount you invested. The floor is $0. The stock can’t go any lower than that. But if you’re a bear, there is no floor. When it’s time to buy to cover, you have to buy at the market price. You will owe the difference between that amount and the price where you sold short.

Hard to Borrow Fees

Some stocks are more difficult to borrow because they’re illiquid or in high demand for shorting. Brokers will charge fees to borrow these stocks. The harder the stock is to borrow, the higher the fee can be. Check with your broker before submitting an order to find out if there is a fee to borrow the stock.

Final Thoughts

Shorting stocks is an advanced strategy that only experienced traders should attempt. Risk capital must be used for these positions. Submitting a buy stop order when you short the stock can help to cap the trade’s potential loss.