How to Short Stock

To short stock is to borrow shares of stock from an investor and sell those shares at the current market price. The short seller is speculating that the price of the stock will fall. When the stock price falls, the investor purchases the shares at the lower price and pays back the stock to the person he borrowed them from. Often, the stock price rises, and the short seller takes a loss.

Instructions

Difficulty: Challenging

Things You’ll Need:

• Brokerage account
• Margin privileges
• Stock

1. Open a brokerage account. Deposit and maintain enough money in your account to place a buy-to-cover order on your short sale.
2. Obtain margin privileges from your brokerage house. You will be required to maintain percentage equity in your portfolio at all times. You will also be charged a maintenance fee and interest on any money you borrow on margin to purchase securities.
3. Look for stocks from companies that have bad fundamentals, whose product may just be a passing fancy or who are susceptible to world events. These are the type of companies whose stock is vulnerable to losing value.
4. Seek out over-the counter securities with rising prices (known as an "up-tick"). You cannot short securities when their prices are falling.
5. Watch the activity of the stock at all times. You will have only a certain amount of time to return the borrowed stock to the original owner.
6. Return the stock to the lender after you have sold it.

Tips & Warnings

• Gain some experience in the market by investing in more traditional ways before you attempt to short stock. Shorting stock is risky and takes some market savvy.
• When you borrow a stock and sell it short, your broker escrows the money from the sale in your account to protect the investor you borrowed it from. The money does not earn interest, and any dividend paid on the stock during this time belongs to the original owner.
• All securities in your portfolio are held as collateral for a margin loan. If your account balance falls below the amount you are required by your broker to maintain, she can issue a margin call. If you don't meet the call by depositing additional assets into your account, your broker may sell some or all of your investments, even if it wipes out your portfolio.
• You will pay taxes on any gains made by selling stock at the short-term rate. Even if you hold the stock for over a year, you may not take advantage of the capital-gains rate.