Traders who speculate on an upcoming decline are the ones who usually sell stocks short, although you can also use short sales to balance portfolio allocations and manage risk.
When you sell stocks short, you borrow the stock from your stockbroker, then sell the borrowed stock in the market and leave an open short position. You close that short position by repurchasing the previously sold stock, hopefully for a profit. As a short seller, you profit by buying back the sold shares at a lower price and making the difference between the sale price and the purchase price on each share.
If the stock goes up, you wind up paying a higher price for the short stock and take a loss. Selling short has some important rules, too. Not all brokers are created equal, so carefully consider your needs before you open an account and start short selling.
Best Brokers For Short Selling:
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Short Selling and Its Importance in Day Trading
Short selling plays an important part in the liquidity of the stock market. If a stock becomes overvalued according to the market, then short sellers borrow shares to sell the stock down, thereby aligning stock prices to their fair value.
The practice of short selling combines the opinions of both bulls and bears to arrive at an equitable price for stock. Short selling provides other benefits to the market that include greater liquidity, which increases the opportunities for short term traders like scalpers and day traders.
More liquidity also leads to tighter bid/offer spreads that reduce overall costs to active day traders. In addition, shorting stocks increases capital formation and lowers the likelihood of bubbles and crashes due to the increased efficiency and more accurate pricing in the market.
With respect to large investors, fund managers allocate funds efficiently and hedge against long-term investment strategies. In combination with futures and options, shorting stock could be integrated into numerous highly profitable day trading strategies, including arbitrage and momentum trading.
What to Look for in a Broker for Short Selling
The best brokers for short selling typically either have a large inventory of stock through their pool of customers or access to a stock loaner that could provide the stock for short sellers.
Here are a few more things to look into:
- Most large stockbrokers can obtain considerable amounts of stock through their big institutional clients and have whole departments dedicated to facilitating stock loans.
- Smaller and less capitalized brokers may not be able to provide every stock to short and therefore may put restrictions on short sales.
- If you have limited assets, also consider the broker’s margin account. You need a margin account in order to borrow shares from a broker. Stockholders and traders generally allow the broker to borrow their stocks and other holdings as collateral for existing margin debt balances, and that is one of the main ways brokers borrow stock.
- For example, Charles Schwab can borrow stock worth as much as 140% of the debit balance amount from a client’s margin account, although Schwab cannot borrow securities that are settled and paid in full.
Our Top Picks for Short Selling Brokers
Here’s a short list of Benzinga’s preferred brokers for short selling:
1. Interactive Brokers
Interactive Brokers ranks as the best online brokerage for short selling and offers the lowest margin rates in the business. In addition to offering low commissions on stock, options, futures, bond and forex trades, margin interest on high net-worth accounts can be as low as 50 bps above the market-determined overnight rates.
Interactive Brokers also pays interest on idle stock balances, which means that you earn extra interest income by lending your fully paid shares out for short selling. Interactive Brokers’ SmartRouting order execution system combs the market to get you the best prices available for stocks, options and combinations.
Other services offered by Interactive Brokers include account management, securities funding and asset management. In addition to offering the lowest margin rates, equity transactions cost just $2.34 per trade.
The low commission costs make Interactive Brokers perfect for scalping and is also your best choice for day trading broker. Options trades have no base cost and commissions are $0.69 per option contract.
Interactive Brokers caters primarily to seasoned traders for its costs but also has something to offer inexperienced traders like its Trader’s Academy, webinars and short videos on trading. The broker’s IBKR Expert Community also includes a Trader’s Insight, Market Pulse and IBKR Quant Blog.
TradeStation’s platform used to only be best for professional traders who needed a highly technical platform. Now, with TradeStation’s new TS GO account option, novice traders will have access to professional-grade stock screeners and extensive educational and development tools to help them develop as investors.
Another strength of TradeStation is the number of offerings available to trade. From stocks to ETFs to futures contracts to cryptocurrencies, TradeStation offers a wide variety of tradable assets. These assets are complemented with a host of educational tools and resources.
Furthermore, as is the case with other brokerages on this list. TradeStation offers $0 commissions on stocks and most ETFs.
3. TD Ameritrade
Award-winning broker TD Ameritrade is ideal for short sellers. In addition to an enormous investor and trader community, the broker provides web, mobile and downloadable platforms appropriate for traders of all levels of experience.
Its easy-to-use platforms provide research and charting abilities, news feeds, order entry, real-time quotes and access to live-streaming news. In addition to stocks, TD Ameritrade offers a variety of other investment vehicles including bonds, CDs, options, forex, over 300 commission-free exchange-traded funds (ETFs) and non-proprietary mutual funds.
TD Ameritrade requires a minimum deposit of $2,000 in cash, stocks or other qualified securities for a margin account. The amount in the margin account can be leveraged at a ratio of 2:1 in compliance with the Federal Reserve. TD Ameritrade offers a flat rate of $6.95 for all stock trades.
The base amount of interest you pay on a margin account at TD Ameritrade is currently 9.5%. If you want to combine your short sales by hedging them with options or futures, TD Ameritrade gives you access to those markets, which can be a real advantage when shorting stocks.
Firstrade is a solid choice amongst the dizzying array of brokerages in the market; all fees are set to mirror (or beat) robo-advisor pricing. In fact, Firstrade offers free trades on most of what it offers.
You can monitor your portfolio’s performance easily with the Firstrade mobile trading app, which offers a more dexterous option compared to a desktop. You’ll be exposed to a touch ID screen for iOS devices, equity ratings and fundamental data, advanced charts, comprehensive dashboard and improved research and trading interface.
Since the advent of Firstrade’s fairly recent Navigator, it’s possible to manage your account, place orders, get market updates and do research, all almost simultaneously. The single screen allows traders to immediately intuitively grasp Firstrade Navigator’s account dashboard. Take note, however, that a lot of the options available on Navigator are geared toward active traders.
5. Charles Schwab
Charles Schwab offers a margin account for selling short stock, although you should make sure whether the stock can be borrowed from Schwab or from another broker, which would incur an additional fee. Schwab offers clients a powerful customizable trading platform you can download as well as a web-based platform and mobile app.
Schwab’s extensive online market research and investment related educational resources rate highly for traders at all levels of experience.
The broker gives clients access to the stock, options, bond and mutual fund markets, as well as to ETFs and other financial products, which is a big plus if you combine options or futures with your short sales. Stock trades are just $4.95, which keeps costs down for short term traders.
The minimum deposit for a margin account at Schwab is $5,000, and the broker requires a deposit of a minimum of 50% of a stock’s value to make a short sale. Schwab’s maintenance requirements also increase the lower the shorted shares are priced. As an example, Schwab’s maintenance requirements on short stock are as follows:
- You put up 50% of the stock’s value to make the initial sale of any stock, and above a price of $16.67 per share you maintain the short position with 30% of its market value after the stock settles in your account.
- If the stock is worth anywhere from $5 to $16.67, then you need $5 per share to maintain the position.
- From $2.50 to $5, you need to deposit 100% of its market value.
- Under $2.50, you need to deposit $2.50 per share.
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