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 Schwab Mobile app. Remember, short selling is done on margin, so a trader must be in a margin-approved account.
A margin account allows a trader to borrow against the securities already held in a brokerage account, which in turn allows the trader to borrow shares for shorting. I can open a short position from the Accounts tab by selecting the margin account where I'll place my trade. Okay, let’s say our trader wants to short McDonald’s.
I’ll pull it up by tapping the magnifying glass and typing MCD. Remember, this is an example and not a recommendation. Next, I’ll tap the Sell button.
From the order screen, I’ll change the Action from Sell to Sell Short. Next, I’ll set the number of shares I want to trade. For this example, I’ll short one share.
I’ll tap the plus button in the Quantity section. Of course, I can adjust the limit price if I want or make any other changes. The Estimated Amount shows the potential credit I’ll receive.
While I’ll receive the credit, up to 50% of it will be locked up because of margin. So, if I was hoping to use the credit to place a different trade, the entire amount won’t be available. McDonalds is a big company, which makes it easy to borrow shares for shorting.
If I were shorting a hard-to-borrow company, then I’d see a message notifying me if there was an additional hard-to-borrow fee. This is a rate in addition to the margin rate, which is charged as an annualized percentage of the overall value of the position. Going back to McDonalds, I’ll tap Review Order.
After reviewing the order on the Order Summary screen, I’ll tap Place Order. I can check on the order status by tapping Order Status. This shows me my filled and 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 Accounts tab by tapping on the margin account with the trade. This shows the price, change in the price, quantity, and so forth.
Notice how short positions have negative shares. It’s important to remember that 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. In fact, I have another short position on Pfizer. Let’s say I’m ready to close it.
I’ll tap the stock. Next, I’ll tap the Buy button. Now, if you look below the stock symbol, you’ll see the hyperlink Buy to Cover.
I’ll click on this because it automatically fills the order box. You’ll remember that I had to sell to open the trade, so I must buy to close the trade. So, I buy to cover the short position or “buy to cover.
” I’ll go ahead and tap Review Order and then Place Order. There are also a couple of features on the Watchlist tab 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 add the shorting features to a watchlist, I’ll tap Custom and then Edit Columns. Next, I’ll scroll down to the Short Sale Data and select Short Sale Availability and Short Sale Borrow Rate. Next, I’ll tap Save.
I’ll scroll to the right to see the new columns. Stocks that are easy to borrow are labeled Available, Not Available stocks can’t be borrowed, and hard-to-borrow stocks are labeled Limited. The number next to limited is the estimated number of shares available within Schwab.
The Short Sale Borrow Rate lists the hard-to-borrow rates for each stock. Stocks with high availability, as well as some limited 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. Because the risk of loss is theoretically infinite, short sellers often make sure to have plan before making a trade.
