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breaking news How do I borrow a stock to sell short?


Convinced that the price of a stock might fall, an investor can borrow the stock from a broker and resell it in the market. The idea is to buy back the stock at a lower price in the future, earning the difference as profit.

This is an investment strategy known as short selling. Betting on a fall in the share price can be risky but allows you to express your point of view on the company.

This article explains how borrow a stock to sell short, as well as the potential risks of short selling.

How to borrow stocks for short selling

If the stock is available for lending, you can borrow a stock to sell it short. To borrow a stock and sell short, you must first open a margin account with a broker. Here are the steps to get started.

Step 1: Open and fund a margin account with your preferred broker.

You can only borrow stocks using a margin account, which allows you to take positions without always having 100% of the necessary cash. Margin accounts provide leverage to the investor. However, to keep a margin account open, you must meet minimum margin maintenance requirements. Essentially, you need to keep a certain amount of cash or securities collateral with the broker.

Most brokers will require you to have 25% to 35% of the total value of your stock positions. For example, if you own $10,000 of stocks, you must keep a minimum of $2,500 in your portfolio. When your portfolio falls below this amount, the brokerage issues a margin call and you must fund the account immediately or risk having your security positions sold.

Step 2: Research potential short sale leads

Investors typically use a combination of fundamental and technical analysis to identify stocks that are likely to be short sale. Overvalued stocks can offer short selling opportunities. Some signs to look for when looking for a potential short sale target include:

  • Rises in the price of a stock without an accompanying reason
  • Outperformance – A rise in the stock price above the rest of the market.

Step 3: Borrow the stock

The broker borrows the target stock on your behalf from holders willing to lend their stock. You pay interest on your margin account, which is determined by the market. With many stocks, you don’t need to take an extra step to borrow the stock before the short sale. Most of the time, when you place a short sell order, the broker will help you borrow the stock without requiring another step.

How to short sell borrowed stocks

After successfully opening the margin account and locating your target stock for short selling, here are the steps to follow to short sell borrowed stocks:

Step 1: Sell the borrowed shares

Place an order to sell shares. If you don’t already own the stock, that means you will be borrowing stock to sell short. As mentioned, this process often happens in the background as the brokerage takes care of it.

You can place a limit order to sell at a pre-determined price or a market order to trade at current market prices. Titles that are easier to borrow have fewer associated costs. Managing borrowing costs properly is essential to prevent them from eating into your short sale profit. Borrowing rates may adjust daily depending on the market.

Step 2: Wait for the price to move

Wait for the price of the stock you just sold to fall, then buy the stock to cover the short position. Hopefully the buy is executed at a lower price than your short sell price.

Sometimes the trade could go against you. This happens when the stock price rises contrary to your expectations. In this case, you may have to buy the stock at a higher price, putting you at a loss.

Step 3: Return the shares you borrowed

After you buy back the same shares, the broker who helped you borrow the shares will put the stock back into their stock lending portfolio. The broker may also charge interest charges related to the cost of borrowing. For shorter-term borrowing of large shares, this cost is often very low.

The risks of shorting stocks

Although it seems simple, short sale is speculative and full of risk. Here are the main pitfalls to avoid.

Unlimited losses

When you open a long position (i.e. you buy stocks in the hope of price appreciation), the risk of loss is limited because the stock can at most drop to zero. When you sell a stock short, the stock price can theoretically rise indefinitely, which means your potential for losses is also unlimited.

bad timing

A company may seem overvalued by all indications. But there’s no surefire way to tell how long it will take for its stock price to drop. While you wait, the margin interest keeps piling up, the stock could go up, and you could risk margin calls.

Short press

A short squeeze occurs when the price of the stock you are shorting spikes, forcing you to close out your position. This phenomenon can be caused by short sellers rushing to close their short positions as stock prices rise. As more short sellers buy the stock, it can cause its price to rise, leading to a situation where more shorts need to be bought back. The end result is another surge in stock prices.

Compare brokers for short selling

Investors can sell short through brokerage houses. Brokerages have securities lending portfolios that make short selling possible. Benzinga offers information and reviews on brokerages that offer short selling capabilities.

  • Best for

    Short sale over $25,000

  • securely through the CenterPoint Securities website
  • Best for

    Global Global Broker for Short Selling

  • securely through the IBKR Stocks & ETFs website

Frequently Asked Questions

questions and answers

Q

How long can you borrow stocks to sell short?

A

The length of time you can borrow shares to sell short depends on how long the stock is available for borrowing. However, most of the time, there is no significant time limit for borrowing stocks to sell. However, you should be aware of the interest charged on the loan, which accrues daily.

Q

Do you need to borrow to sell short?

A

You have to borrow to sell short because you can’t sell stocks out of thin air.


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