How to Short a Stock at WellsTrade
Most people complain when the stock market goes down. But smart people know better. After reading this article, you’ll be one of the smart people. You’ll know that it’s possible to make money when the markets go down by shorting stocks. WellsTrade in particular lets you do just that.
Quick Overview
Although shorting is a rather esoteric practice, the concept behind it is rather simple: you borrow a security from someone who owns it and then immediately sell it in the open marketplace.
When the price goes down, you enter the market, buy the security back, and then return it to the owner. Notice that you still buy lower than you sold; and that’s why the trade makes money.
Sell First
After you open your WellsTrade account, you can do some research to find stocks or ETFs (you can’t short mutual funds) that you think are too expensive. Once you find one, you’ll be ready to place a short trade.
A good place to begin is with WellsTrade’s stock or ETF scanner. These tools are located under the “Research” tab in the top menu of the broker’s website. The ETF screener is able to search by Lipper rating. When we looked for funds with only 1 star, the lowest possible rating, we found PXJ, the Invesco Dynamic Oil & Gas Services Fund. If the price of oil is going southward, this would be a good way to capitalize on that movement.
On a stock or fund’s profile at WellsTrade, you’ll see a blue trade button. Click on this to get the order ticket. Select sell (not buy). It may feel a little strange to sell first. Don’t worry, though. WellsTrade will borrow the securities on your behalf, and the sell order will be processed.
You can select day or good-till-cancelled. You can also select market or limit for the order type. The limit order will guarantee a minimum price, just as it would if you were submitting a regular sell order.
Buy Second
Although it may have felt strange to sell first, you’re going to have to buy second, and this too is a little different. This is known as “buying to cover.” When you buy this time, the shares will be sent back to the account WellsTrade got them from.
For this second trade, you should select “buy to cover” on the order form. If you don’t see that, just select “buy.” Hopefully, the price is lower than your purchase price. Although the order steps have been reversed, you still sold high and bought low. That general rule hasn’t changed.
When you fill out the order ticket, you’ll see four types available: limit, market, stop, and stop limit. You can place a market or limit order to secure a profit. A limit order could be placed immediately after your sell order. It will fill once the price drops below the limit price. A market order would fill right away.
Stop and stop limit orders are placed above the sale price. Their purpose is to prevent excessive losses. If the stock price climbs too high, to the stop price, an order will be triggered to end the carnage.
Account Requirements
As with other brokerage firms in the United States, in order to short securities at WellsTrade, you’ll need a margin account with at least $2,000 of equity.
The Cost of Shorting on Wellstrade
Margin interest may be owed on short sales at WellsTrade. The broker’s interest rates vary from 6%
to 10%, depending on the amount owed. Stocks that are hard-to-borrow could be subject to additional
fees. Many firms charge less for margin - see
Broker Margin Rates.
Margin
WellsTrade follows Regulation T for margin requirements. This means initial positions have 2:1 leverage, and the figure for maintenance is 4:1. WellsTrade states that it can increase margin requirements (i.e., decrease leverage) for certain securities.
Other Bearish Strategies at WellsTrade
In addition to shorting stocks, WellsTrade clients can engage in a variety of other trading activities that make money off of declining stock prices. For example, the broker offers trading in options contracts. Selling calls and buying puts are two strategies that will be profitable if the contracts’ underlying stocks or ETFs go down in price.
Alternative For Traders
For short traders a good alternative broker is
Webull. It
has a number of advantages over WellsTrade: $0 commissions on options trades, lower margin rates,
paper (simulated) trading, and advanced trading tools.
Open Account
Open WeBull Account
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