Upbeat music plays throughout.
Narrator: When a trader thinks the price of a stock will decline, they may choose to short sell, or short, the stock. Let's go over how to open, monitor, and close a short stock position using the thinkorswim® paperMoney® platform.
Remember, short selling is done on margin, so a trader must be in a margin-approved account. A margin account allows you to borrow against the securities you already hold in your brokerage account. Your accounts are labeled at the top of the platform. Trading on margin is risky because margin interest could add to potential losses.
Starting at the Trade tab, let's say I want to short Tesla. I'll enter TSLA into the symbol box. Of course, this is just an example and not a recommendation.
Animation: The easy-to-borrow, or ETB, function is highlighted on the platform.
Narrator: Next, I'm going to check the availability of the company's shares. This means I'm going to see how easy it is to borrow shares. The platform says ETB, which means easy to borrow. Tesla is a large company with millions of shares traded each day, which is why borrowing is easy.
Despite a stock being easy to borrow, there's no guarantee that a brokerage can continue to maintain a short position for any period of time. For example, an influx of selling could require the broker to close your position without regard to your profit or loss. This risk is larger when a stock is hard to borrow.
Carvana (CVNA) is an example of a hard-to-borrow stock. It's marked HTB. This doesn't mean you can't borrow the shares, but you may have to pay a hard-to-borrow fee, which will increase the difficulty of turning a profit and could add to potential losses.
If you don't see an ETB or HTB, like in the case of Artivion (AORT), then you can't borrow shares.
Going back to Tesla, I'll initiate the order by clicking the Bid price. Next, I'll set the number of shares I want to trade. For this example, I'll short one share.
Of course, I can adjust the limit price if I want or make any other changes. I'll click Confirm and Send.
The Order Confirmation Dialog box gives me the Order Description to review. It shows that if I'm filled at the limit price, I'll receive a credit of $193.33 to my account.
Despite the credit for the trade, notice that the trade decreases the buying power because half the cost of the trade is frozen for margin. So, if I was hoping to use the credit to place a different trade, I'm limited on how much of it I can use.
If I were to short a hard-to-borrow company like Plug Power (PLUG), then I'd see a message notifying me of an additional hard-to-borrow fee. This rate is in addition to the margin rate. It's charged as a percentage of the overall value of the position. In this case, I would pay an annualized 1.25%, which is a fraction of a cent per day.
I'll go back to my Tesla order and click Send to complete the trade.
If the trade fills, a notification will appear at the top. However, I can also go to the Monitor tab and check the Working Orders.
Because a short position is leveraged using margin, it's important to keep a close eye on the position to avoid large losses and high margin costs. You can manage your short positions from the Monitor tab.
A short position will have negative shares. A gain occurs when the Trade Price is higher than the Mark. A loss occurs when the Trade Price is lower than the Mark. These prices don't reflect margin costs.
Animation: A list is opened from the HON position. Create closing order is selected from the list. Buy +1 HON at 201.1 limit is selected.
Narrator: Here's an open short position on Honeywell. Let's say I'm ready to close it. First, I'll click on the symbol. Next, I'll select the Buy order. Remember, we sold the shares to open a short trade, so now we must buy the shares to close it.
I'll review the order ticket to make sure everything looks good and then click Confirm and Send. Once again, I'll review the order and click Send to complete the process. Finally, I'll confirm the order filled and the position is closed.
There are also a couple of features in the Watchlist section that short sellers should know about.
A watchlist is a list of stocks or securities that you're keeping an eye on because you may be interested in eventually trading them.
To make this easier to follow, I'll click the list icon in the gadget and then detach and expand it.
To add the shorting features to a watchlist, I'll click gear icon and select Customize. Next, I'll type in HTB for the hard-to-borrow/easy-to-borrow column. I'll click Add Item. Next, I'll type in Short Sale Borrow Rate. I'll click Add Item. Finally, I'll click OK.
Now, I can see which stocks are easy or hard to borrow and I can see the Short Sale Borrow Rate for each stock. Stocks that are easy-to-borrow, and even some of the hard-to-borrow stocks, have no additional fees. However, the harder it is to borrow a stock, the higher the rate will be.
Short selling is a bearish strategy that allows investors more flexibility to respond to market changes. However, it's also a two-edged sword that requires a plan that defines when to open and close the trade. Consider practicing shorting stock using the thinkorswim paperMoney platform before you move on to the real thing.
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