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Best Broker for Shorting Stocks

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What is Short Selling?

Short selling is when a trader borrows shares of a stock from their broker and then immediately sells those shares on the open market. The trader borrows the shares to sell at the current market price with the hope or expectation the price per share will drop. When the price has dropped the trader re-purchases the shares at the new market price to cover, or in layman terms, to return the shares to the broker. The trader then keeps the difference between the price the shares were sold for when borrowed and the price they were bought back for when the short was covered, which creates the profit in the trade. If the price goes up after the trader has borrowed and sold the shares the position still has to be covered and this is where the risk comes into short selling.

When is Short Selling Used?

Short selling is a great investment strategy in a bearish market or when an investor believes a specific stock has peaked. In a bearish market, many investors think you can only lose money and should run, but in reality, the exact opposite is true. There is plenty of profit potential and risk to reward potential if short selling strategies are on the mind of investors.

Not just ideal for bearish markets, but if a particular stock or even industry has peaked and a downward trend is inevitable the smart investor will ride that trend down by shorting the stock. Then when the stock bottoms out the same investor can go long the stock and ride the trend right back up, never getting out of the stock and riding its trends up and down.

Why Brokers Matter When Shorting Stocks

When shorting a stock, shares have to be available for the trader to borrow. Not all stocks, particularly small-cap stocks, have the ability to be shorted. A broker must have shares of the stock on hand for the trader to borrow and sell. Not all brokers have a large portfolio of stock available to short simply because the shares are not as abundant as larger mainstream stocks, of which most brokers will have many shares of. This is why the choice of broker is vital to the trader who intends to short sell stocks any time in the future. The size and volume of trades conducted on a daily basis by TD Ameritrade make them one of the best online brokers for short selling.

Benefits of TD Ameritrade

As the number 1 ranked broker, TD Ameritrade offers short sellers many benefits not available elsewhere. For new accounts, TD Ameritrade offers very favorable account terms for an initial break in period. Being one of the 5 largest brokers in the United States traders can rest assured they will have a wide array of stocks available to short. Some options TD Ameritrade offers that have not yet been mentioned include the tools and resources available free to clients. All traders have the option of placing their trades on any of the 4 state of the art platforms: a mobile app, web based platform, Trade Architect, and the most advanced and recommended option, the desktop application Thinkorswim.

Best brokers for shorting stocks


Thinkorswim is the desktop based application that offers tools and resources not readily available everywhere in the trading market. When short selling the investor needs a platform that is both reliable and consistent, but also cutting edge with next generation technologies. Every order type a short seller could need is at his or her disposal in Thinkorswim. Theoretically, the loss potential is infinite for short sellers because the stock price could rise to any level, unlike longing a position where the maximum loss potential is realized when the stock price hits $0. Because of this, it is vital to place stop loss orders on short sales depending on the risk tolerance and strategy developed hopefully before ever entering a trade, all of which can be done easily in Thinkorswim. Learn more about Thinkorswim trading platform »

Best broker for short selling

Rates and Fees

One of the more basic yet no less vital points to consider when choosing a broker for short selling is the fees that will be assessed. To start short selling traders must have a margin account with a value of $2,000 or more, then the standard fees apply to short selling. There is no fee to borrow the shares from the broker and traders are assessed the standard $6.95 per trade when the shares are sold then $6.95 again when the shares are purchased back to cover the position. These fees are some of the lowest in the industry even with a broker offering the best platforms and resources in the industry.

Best Broker For Short Selling Summary

At first glance, short selling may not sound like the most lucrative path to investing success but it can be a key part of any trading strategy if used correctly and done with the correct broker backing. When short selling the loss potential is theoretically infinite so the correct tools to implement a short selling strategy is necessary. All the tools and resources a short seller could need to maximize his or her gains are readily available TD Ameritrade which in 2017 is rated Best Broker for Shorting Stocks.

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Best ETFs for Shorting: Inverse, Against the Market ETFs

An ETF is an investing vehicle that holds a group of stocks and can be traded on major stock market exchanges like a stock. ETFs, though they may track a market, commodity or sector like a mutual fund, are nevertheless not the same as mutual funds. They’re more convenient: they can be traded like a single stock during normal business hours and after-hours trading, and they can be bought on margin and shorted.

This liquidity, coupled with a variety of market, sector and commodity ETFs, make them convenient for trading strategies such as shorting. You can go on margin and short ETFs in the traditional way, like a stock. However, traders also have the option of buying inverse ETFs, which achieves roughly the same effect as shorting, but is simpler. These products move in the opposite, or inverse, direction of the underlying market or sector – so if the underlying market loses value, you make a profit.

Inverse ETFs are purchased by short-term traders who wish to make a quick profit from a downturn, or as a risk-reducing hedge by those who have long positions in the underlying market. Investment advisors generally counsel against shorting any investment as a long-term strategy, however, since historically the market always moves up. Inverse ETFs have other potential pitfalls: they can sometime be illiquid, meaning it’s harder to make a trade when you need to. Inverse ETFs may lose value in a flat market. And since inverse ETFs require more oversight by fund managers, the fees for them may be more expensive that other ETFs.
Inverse ETFs do have some advantages, though, when used judiciously. The variety of inverse ETFs offers choices: you can short the whole market, a sector of the market, or a selected commodity.

One of the biggest advantages of an inverse ETF is that you can short the market without having to have a margin account. While you still run the risk of losing money if the underlying market or sector goes up, you don’t have to worry about losing more money than you invested – as you would if you were on margin.

Double-and even triple-leveraged inverse ETFs are also available, designed to go up twice or three times the percentage that the underlying market goes down – though some financial advisors warn that they don’t always deliver on that promise. One reason is that market volatility hurts the long term value of a leveraged ETF. You can use leveraged Inverse ETFs to make a lot of money, very quickly, when the market moves your way. But when the market goes against you in a double- or triple-leveraged trade, your investment can simply melt away before your eyes. That’s why advisers emphasize that inverse ETFs, and especially leveraged inverse ETFs, are a short-term play. Holding them for a longer time increases the odds that the market will move against you, and once it does, it’s very hard to recover.

So which ETF sectors are good to short ?

The European debt crisis has economists worried about the possibility of a European recession in 2017 and what that would mean for the U.S. Europe's Saxo Bank made the tongue-in-cheek prediction that the European stock market will implode under its ongoing debt crisis, necessitating an extended “bank holiday” and the formation of a “new Europe.” It foresees many European commercial banks being nationalized. While most economists wouldn’t go that far, worries about Europe are still front and center. Sectors with high exposure to European financials are vulnerable if the crisis is not resolved.

Therefore, the Wall Street Sector Selector website counsels its readers to avoid two ETFs that track Europe, because they have significant exposure to European financials.

Motley Fool Advisor David Meier calls U.S. financials and industrials some of the worst sectors for 2017, if the global economy stays slow. Some companies in the industrial sector also carry high debt, which combined with weak demand, may result in a difficult year.

Bob Doll of the BlackRock investment management firm states that the firm is underweight the financial sector in 2017 due to its concerns about “revenue growth potential, regulatory risks and deteriorating and residual credit concerns.”  He also calls the utility sector overvalued, in part due to weak earnings prospects.

And finally, you may want to consider the rumors that 2017 may be the year that the world is attacked by aliens, suffers a massive natural disaster, or collides with Planet X. Better short the market while you can.

Updated on 7/4/2017.

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