Is it possible to short stocks at online brokerages like Scottrade or Ameritrade? I see no reference to this on these sites. What are the steps?
How to make a small fortune shorting stocks:
Step 1) Start with a large fortune.
Sure, they allow you to short stocks. Not all stocks are short-able, but most are. You are required by federal law to have a certain dollar amount in escrow in a margin account with your broker. All that means is, after you have shorted a stock, you need a certain cash balance in your account that can be tapped by your broker if you cover your short for a loss.
Shorting a stock is essentially selling a stock now, then buying it back (cover) at a lower price. You collect the difference. You are betting the price of the stock will decline.
When you “long” a stock, your losses are limited to the price of the stock. If the stock sells for $5/share you can only lose $5/share. If you short a stock, your losses are potentially infinite, the more the stock price rises after you short it, the more loss you are accumulating. When you cover your short, that means you buy the stock you originally sold and essentially close the transaction. Shorts are ALWAYS traded in a margin account. Margin accounts charge you interest. So as long as you hold your short position, you are being charged interest on the total value of the stock. At any time, your broker may hit you with a margin-call. A margin-call is telling you, you need to put more money into your margin escrow account. Margin-calls typically occur when your position is in the red, the brokerage wants more cash “insurance” from you to cover any losses. If you don’t have the cash to cover a margin-call, some or all of your current holdings will be liquidated to cover the amount they requested.
Because of all of these negatives working against you when you short, short positions aren’t usually held for a long period of time. All in all, it’s very risky business.