Shorting Stocks at Merrill Edge
Does stock market volatility worry you? It shouldn’t. If you know what you’re doing, you can make money regardless of the stock market’s direction.
If stock prices go down, you can make money. Although this may sound illogical, it’s very true. With a technique known as shorting, you’ll make money if stocks go down in price—and lose money if they go up.
Bank of America's Merrill Edge is one broker that permits shorting. Here are the details:
Overview of Shorting
When you short a stock (or any other asset), you first borrow it and then sell it immediately. When the price goes down, you buy the asset back and return it to the part you borrowed it from. Although you sold first, notice that you sold at a higher price than you bought at. That’s the key. You’re still buying low and selling high.
Sell Short First
Inside your Merrill Edge account, you can use the broker’s web-based screener to help you find overvalued stocks. When you find one you think is ready for a drawdown, click on the “Trade” button. This can be found on a stock’s profile, in the drop-down menu that appears after typing in a stock’s ticker in the search field, and in the screener’s search results.
You’ll get a trade ticket on a new web page. For the trade action, select “sell” (or “sell short” if you see it) from the drop-down menu. The ticker symbol will be automatically populated.
Next, enter the quantity. There’s a handy calculator next to the quantity field if you want to convert a dollar amount to number of shares.
For the order type, you can enter market or limit. A limit order will guarantee you a minimum price, just as in a regular sell order.
Buy to Cover Second
If the stock or ETF price has dropped far enough for you, it’s time to exit the trade. This will require a “buy to cover” order, which will end the trade. There are a few different ways you can do this.
One way is to simply use a market order when you’re ready to buy to cover. The order will fill immediately at the current market price. If you want a guaranteed price, you can submit a buy limit order, which will give you a certain price or lower.
You could also submit a buy stop order. This would be placed above the market price. The purpose of this order is to limit upside loss. Remember that this is a short trade, and if the price goes up, you lose money.
On the order ticket, you can specify whatever stop price you want. It’s also possible to submit both a buy limit order (to lock in a profit) and a buy stop order (to prevent an excessive loss).
Account Requirements
To initiate a short sale, you’ll need to have at least $2,000 in assets in your account. The account will also need to be enabled for margin. You are borrowing something, after all, and that requires margin.
Merrill Edge Shorting Stocks Fees
Merrill Edge recently dropped its stock and ETF commission down to $0. This great rate applies to shorting as well as regular trading. There are no surcharges for short sales.
Merrill Edge Shorting Interest Rate
Keep in mind, though, that when you short a stock at Merrill you will pay at least one
interest rate. Currently it’s 9.989% for all stocks held after the settlement date. If the stock is hard to borrow, there is an additional rate, which varies by market price and number of shares.
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Alternative For Shorting
For short selling, a great alternative broker is
TD Ameritrade. It
has a number of advantages: better range of shortable products, the best trading platform,
and virtual trading.
Learn more...
Try TD Ameritrade For Free
Open TD Ameritrade Account
Margin
Merrill Edge follows the SEC’s recommendations under Reg T for initial and maintenance margin requirements. This means an initial position requires 50% of the purchase price held in other assets. Cash can be one.
For maintenance, the requirement is 30% for stocks above $16.67. This figure goes up to 100% as the stock price comes down. For equities below $2.50, the figure is actually higher than 100% because the margin requirement is $2.50.
Short Strategies With Options
Several option strategies make money when the underlying stock goes down in price. All of these can be traded in a Merrill Edge account. Examples include bear put spread, reverse butterfly call, and short collar.
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Chad Morris is a financial writer with more than 20 years experience
as both an English teacher and an avid trader. When he isn’t writing
expert content for Brokerage-Review.com, Chad can usually be found
managing his portfolio or building a new home computer.
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