(if you are following the order that I have arranged in the Trading Essentials page, you could ignore all the links of related articles in this page)
Foreword
Do you know how to short-sell stocks? Short selling is an advanced strategy when it comes to trading stocks. Understanding how it works could help you to determine what you are going to learn in the future. In this article, I will walk you through the steps you need to take to short sell stocks, as well as things you should be aware of when short selling stocks.
What is Short Selling?
Short selling is a practice that allows investors or traders to profit from falling prices. In other words, they sell high and cover(buy) low, conceptually opposite to long buying. Often, traders or investors would short sell securities when they believe the price is going to fall. It is a well-known strategy that traders or investors would use during a bear market.
Short selling is an advanced strategy compared to long buying. It requires traders or investors to consist of robust self-discipline and risk management techniques. If you are a beginner trader or investor, you should never short-sell since it may destroy your account in a moment.
How do short-selling works?
Short selling works opposite in contrast with long buying. When long-buying securities, traders will buy a security at a lower price and sell it at a higher price to make profits. However, when short-selling securities, traders will first sell security borrowed from their broker at a higher price and cover them at a lower price to make profits.
The sources of borrowed securities often are from Brokers’ inventory, their clients’ accounts, or other brokers. Brokers will charge traders fees when traders are borrowing securities from them (I will explain more later).
Steps to short stocks
Some of the procedures of short-selling stocks are similar to how we buy stocks. Make sure you have read the related article before you start reading the below paragraphs.
❗Please noted that this article consists of various terms you may not know now, and you are NOT required to understand them now. They will be covered in later articles. My aim for writing this article is to give you the whole picture of stock trading before you learn how to trade stocks.
Related articles: How to buy stocks?
1. Open a Margin Account
Before short selling a security, you are to open a margin account with your broker. A margin account is a brokerage account type that allows you to borrow money (also known as leverage) and security from your broker. By opening a margin account, you will be able to do a short sell.
Related article: How to choose your account type? (Margin V.s Cash)
2. Check the stock are available to short or not
After opening and funding your account, you need to find the stock that you want to do a short sell. Same as what we do when buying stocks, type the Ticker in the search panel. Then, check whether they could be short-sell or not. The way that brokers show whether they support short selling of that stock varies. Some may use simple logos to tell you they support short selling of those stocks. Some may use other ways.
3. Check the Fees
Brokers will charge traders various fees such as borrowing fees, locating fees, and overnight fees in different cases. To understand how they are charged, we need to know what an Easy-To-Borrow (ETB) stock and a Hard-To-Borrow (HTB) stock are.
Easy-To-Borrow (ETB) Stocks
An easy-to-borrow (ETB) stock is usually stock that is widely traded in the stock market, such as stocks in the S&P 500 and Russell 1000. Same as its name, they are easy to be borrowed. Often, brokers do have shares available of ETB stock or can easily find them. So, brokers usually will only charge traders a borrowing fee when traders borrow ETB stocks from them.
| Fess | Why it is charging |
|---|---|
| Borrowing Fees | It is charged when you borrow securities from you broker. (Basic fees) |
| Overnight Fees | It is charged when you hold a short position overnight. (Additional fees) |
Hard-To-Borrow (HTB) Stocks
A hard-to-borrow (HTB) stock is usually stock less known and traded (lower liquidity) by investors or traders when compared to easy-to-borrow ones. Often, brokers do not have shares available of HTB stock, and they must locate shares to borrow.
To borrow hard-to-borrow (HTB) stock, traders need to ask their broker to locate the stocks for them. Locating fees would then be charged after the location of HTB stocks. Apart from the locating fees, brokers will also charge traders borrowing fees if traders use the borrowed stocks.
(Please noted that locating fees will be charged even though you did not use the borrowed stocks or not)
| Fess | Why it is charging |
|---|---|
| Borrowing Fees | It is charged when you borrow securities from you broker. (Basic fees) |
| Locating Fees | It is charged when you ask your broker to locate HTB stocks |
| Overnight Fees | It is charged when you hold a short position overnight. (Additional fees) |
Overnight fees
Apart from borrowing fees and locating fees, brokers will charge traders overnight fees when traders are holding a short position overnight. Keep in mind the overnight fees vary with different brokers.
4. Short and Cover
After you have accepted the borrowed security, you could then send orders to short sell the security and cover it at a lower price to make profits. The procedure of placing an order would be the same as how we buy stocks. Send an order that included your order size, order price during market hours.
| Things to input | Meaning |
|---|---|
| Order Type | A Market Order or a Limit Order? |
| Order Size (Quantity) | How many shares you are going to purchase? |
| Order Price | How much you are willing to pay for the securities? |
| Route | Your order is a smart route or direct route? |
| Time in Force | DAY*? GTC**? FOK***? Others? |
DAY*: DAY order. Your order will be canceled if the order doesn’t get execute at the end of the trading day (most common)
GTC**: Good Til Canceled order. Your order will stay forever until it get executed or canceled (second common)
FOK***: Fill Or Kill order. Your order will not be executed with partial fills. All or none. (third common)
Related article (Order type and Trading Screen): Limit Order, Market Order and Level 1 & Level 2.
5. Order status
Same as how we buy stocks, after you have sent the order to the system, you need to check whether your order is filled, pending, or cancelled.
| Status | Meaning |
|---|---|
| Filled | Your order is completed |
| Pending | Your order is waiting to be completed (still find matches with other order) |
| Cancelled | Your order is stopped due to some issue |
Related article: ECNs, the trading system
6. Return
Last, after you have used the borrowed security, please make sure you return the borrowed security. If you did not do it, the borrowed security would stay in your account, and your broker will charge you overnight fees.
Final Thought
We have briefly covered the steps you need to take to short sell stocks in this article. Make sure you read other related articles provided in this post and blog, especially the article about choosing your account type. They will give you a clear picture.
[Next Lesson: How To Choose Your Account Type?]
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