Short selling allows you to profit when stock prices fall. But getting started requires the right account setup, understanding order types, and proper risk management. This guide walks you through everything you need to short your first stock.
Step 1: Open a Margin Account
You cannot short sell in a regular cash account. You need a margin account because short selling involves borrowing shares from your broker.
To open a margin account:
- Apply for margin trading through your broker (most brokers have an online application)
- Meet the minimum equity requirement, usually $2,000
- Pass a suitability check showing you understand the risks
- Sign the margin agreement and short selling disclosures
Note: If you are a pattern day trader (4 or more day trades in 5 business days), you need at least $25,000 in your margin account. This applies to both long and short day trades.
Step 2: Find a Stock to Short
Not every stock is a good short candidate. Look for stocks with:
- Weak fundamentals: Declining revenue, shrinking margins, increasing debt
- Bearish technicals: Downtrends, breaking support levels, bearish chart patterns
- Overvaluation: High P/E ratios compared to sector peers
- Negative catalysts: Upcoming earnings that might disappoint, regulatory issues, competitive threats
Research your target thoroughly. Unlike going long where you can hold forever, short positions have ongoing costs and risks that increase over time.
Step 3: Check Share Availability
Before you can short a stock, your broker must locate shares to borrow. This is called a locate.
Most brokers show borrow availability in their trading platform:
- Easy to borrow (ETB): Plenty of shares available, low or no borrow fee
- Hard to borrow (HTB): Limited shares, higher borrow fees, may require pre-borrow
- Not available: No shares to borrow, you cannot short this stock
Checking Borrow Availability
In most trading platforms, you will see one of these indicators next to the stock:
- Green checkmark or ETB - Easy to borrow
- Yellow warning or HTB - Hard to borrow, check fee
- Red X or Not Available - Cannot short
The borrow fee is shown as an annual percentage. A 10% borrow fee means you pay about 0.83% per month to hold the short position.
Step 4: Understand Margin Requirements
When you short a stock, you need to maintain certain equity levels in your account:
- Initial margin: Usually 50% of the short position value. To short $10,000 of stock, you need $5,000 in margin.
- Maintenance margin: Typically 25% to 30% of the current position value. If your equity falls below this, you get a margin call.
- Special requirements: Some volatile or low priced stocks have higher margin requirements, sometimes 100%.
Step 5: Place Your Short Sale Order
To short a stock, you place a sell order even though you do not own shares. Here is how:
Select Sell or Sell Short as your order action
Enter the stock symbol
Enter the number of shares
Choose your order type:
Market order: Executes immediately at best available price
Limit order: Only executes at your specified price or better
Stop order: Becomes a market order when stop price is reached
Set the duration (day order or good till canceled)
Review and submit
Tip: Use limit orders when shorting, especially for less liquid stocks. Market orders can fill at worse prices than expected when there is low volume.
Step 6: Set Your Stop Loss
Never short a stock without a stop loss. Since losses on shorts are theoretically unlimited, you must define your maximum loss before entering.
Common approaches:
- Percentage based: Set stop at 10% to 20% above entry price
- Technical based: Set stop above the nearest resistance level
- ATR based: Set stop at entry plus 2 to 3 times the Average True Range
Example Stop Loss Setup
You short stock XYZ at $50. You decide to risk 15% on the trade.
- Entry price: $50
- Stop loss: $57.50 (15% above entry)
- Maximum loss per share: $7.50
- If you short 100 shares, your max loss is $750
Place a buy stop order at $57.50 immediately after your short fills.
Step 7: Monitor Your Position
Short positions require more active management than long positions. Watch for:
- Price movement: Is the stock going in your direction?
- Margin level: Are you maintaining enough equity?
- Borrow status: Could your shares be recalled?
- News and events: Earnings, analyst upgrades, buyout rumors can spike the price
- Short interest changes: Is crowding increasing squeeze risk?
Step 8: Close Your Position (Buy to Cover)
To close a short position, you buy back the shares you borrowed. This is called covering or buying to cover.
- Select Buy to Cover as your order action
- Enter the same number of shares you shorted
- Choose your order type and price
- Submit the order
Once filled, your position is closed. The shares are returned to your broker, and your profit or loss is realized.
Order Types for Covering
- Market order: Cover immediately at current price. Use when you need to exit fast.
- Limit order: Cover at a specific price or better. Use for taking profits at target levels.
- Buy stop: Cover when price rises to your stop level. Use as a stop loss.
- Buy stop limit: Like buy stop but limits the execution price. Use to avoid bad fills in volatile conditions.
Common Mistakes to Avoid
- No stop loss: This can lead to catastrophic losses
- Shorting into strength: Do not short a stock just because it seems too high
- Ignoring borrow costs: High fees eat into profits quickly
- Fighting the trend: Shorting uptrending stocks is difficult even if overvalued
- Oversizing: Keep short positions smaller than long positions due to unlimited risk
- Holding through earnings: Surprise beats can cause massive squeezes
Track Your Short Trades
Pro Trader Dashboard tracks both long and short positions, calculates your borrowing costs, and monitors short interest to warn you about potential squeeze situations.
Summary
Shorting stocks requires a margin account, available shares to borrow, and careful risk management. Always check borrow availability and fees before trading. Use stop losses religiously since short positions have unlimited risk. Start with small positions until you gain experience with the unique dynamics of short selling.
For more on managing risk, read about short selling risks or learn what happens during a short squeeze.