How to Sell Stock Short on E*TRADE
While most traditional portfolios consist of only long positions, some strategies try to profit by also being able to identify and bet against stocks that are perceived to be overvalued. The popularity of so-called long/short strategies has been growing because, in theory, it offers more opportunities to profit by capitalizing from market mispricing on both ends of the spectrum. This article will show you how you can enter into short positions in your Etrade account.
What is Short Selling?
When you short sell a stock you are betting that its price will go down. Once you place a “sell-short” order on Etrade you are basically selling shares in the stock that you have borrowed from someone else who owns them. When you enter a buy-to-cover order to close your short position you are buying the shares back from the market (hopefully at a lower price) so they can be returned to the lender. Etrade manages the logistics by locating shares for you to borrow behind the scenes so that from your perspective placing a sell-short order is as easy as entering a long position with a buy.
What Are Etrade’s Rules on Short Selling?
Most brokers, Etrade included, require you to have a margin account with at least $2,000 in order to be able to short stocks. In order for you to be able to short a stock, Etrade must also be able to locate the shares to borrow. Even after the short is initiated, there is no guarantee Etrade will be able to let you keep it open indefinitely shares become harder to borrow. Etrade, just like TD Ameritrade and most brokers, does not allow shorting of OTC or penny stocks.
Placing a Short Sell on Etrade
Placing a short sell order on Etrade is very similar to placing a standard sell order except you will select “Sell-Short” for the action, and after the trade is executed the proceeds from the short sale will not be available for you to use. The commission Etrade charges you would be the same as placing a long buy or sell order. Because you are effectively selling borrowed shares, Etrade will charge you interest depending on how much cash and marginable securities you have in your account to serve as collateral.
Marking to Market
As the price of the shorted stock moves (either with or against your trade) Etrade will reflect this as either an unrealized gain or loss in your account by marking your shorts to market at the close of each trading day. If the stock price rises sharply from where you shorted it and you therefore have a large unrealized loss, you may receive a margin call requiring you to post additional cash or marginable securities to your account in order to keep the position open. In theory, you could be forced to close your short position with little notice, which is why your broker requires a sufficient balance in your account to buy these shares back at market price each day.
How Do I Close My Short Position?
When you are ready to close, or cover, your short position on Etrade, you will simply create a “Buy-to-Cover” order for the shares you shorted. Once the order is executed, any unrealized gain or loss on the position will become realized.
Risks of Short Selling
In addition to the standard risks of investing/trading in the stock market, shorting stocks carries some additional risks. Most significant of these is that your potential losses on a short position are unlimited (since there is no limit to how high a stock price can go) whereas if you buy a stock the most you can lose is your initial investment. Secondly, Etrade can’t guarantee they’ll be able to borrow shares indefinitely and so you could be forced to close your short position earlier than you planned.
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