Upbeat music plays throughout.
Narrator: 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 schwab.com. Then I'll introduce a few other tools traders may find helpful when analyzing a possible stock to short.
Remember, short selling is done on margin, so a trader must be in a margin-approved account. A margin account allows traders to borrow against the securities already held in a brokerage account.
There are several ways to initiate a short position on schwab.com, in this demo we'll use the All-In-One Trade Ticket®. This is done by clicking the Trade tab and then selecting All-In-One Trade Ticket.
Next, I'll enter a symbol. Let's say our trader is interested in shorting Exxon Mobile. I'll enter XOM in the Symbol box. As always, this is an example and not a recommendation.
Animation: A box highlights the name, last price, bid and ask prices, the opening price, previous close and the day's trading range, and the 52-week highs and lows.
Narrator: Here I see a detailed quote showing Exxon. I'll click the Select action list. From the list, I'll click Sell short.
Next, I need to determine how many shares to trade. Since this is just an example, I'll use one share.
I can also change the Order type, the Limit price, and the Timing of the trade.
Once I'm satisfied with my order, I'll click Review Order.
Animation: A box highlights the Estimated Total Amount of $103.81, Estimated Exchange Processing Fee of $0, and the Estimated Commission of $0.
Narrator: The next step is to verify the order. The Estimated Total Amount is how much I could potentially receive if the order fills at my limit price minus any commissions.
Animation: The screen changes from Exxon to Churchill Capital Corp. (CVII). The new stock has a Borrowing Rate of 13.5% and an Estimated Daily Fee of $0.02. In order to verify the trade, the investor must click the I Agree button.
Narrator: Exxon 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 of 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 Exxon, after I'm done verifying the order, I'll click Place Order.
Finally, I get the confirmation that my order was received.
I can monitor my order by going back up to the Trade tab and selecting Order Status.
Once the order is filled, I can manage my short positions from the Positions page under the Accounts tab. Here's the Exxon trade and here's another short position on Newmont (NEM). Notice that the share quantity for short sales is negative.
When monitoring my position, I'll see that a gain occurs when the Cost is higher than the Market Value. A loss occurs with the opposite—the Market Value is higher than the Cost. Remember that these numbers don't account for margin interest.
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.
Let's say I'm ready to close Newmont. I'll do this by selecting the list icon at the end of the stock's row and selecting Buy Shares.
In the order box, 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 but traders often shorten the phrase to “buy to cover." Once I'm happy with the order, I'll click Review.
I'll review the order and then click Place Order.
Now, that you know how to open and close a short position, let's discuss some of the tools related to shorting. I'm going to pull up Deere (DE) in the Research Tools section.
Animation: The widget shows the Number of Shares – Previous Month as 2.64 million.
Narrator: In the section titled Short Interest, there are several tools including the Percentage of Shares Outstanding, which tells me that 0.92% of the shares are being shorted. The total number of shares is 2.57 million, which is lower than the previous month.
More short selling could put extra downward pressure on the stock and increase the likelihood of the share price falling. Of course, in real time there is no way to know if selling pushing the stock price down is from short sellers or from traders closing a long position or a mix.
While we also don't know the causes of a stock price going up, one factor could be a short squeeze, which takes place when the stock starts to rally, and the short sellers feel forced to close their short positions to avoid losses or margin calls. This can result in the stock rallying even higher if even more short sellers clamor to buy back shares at higher prices. A short squeeze could result in larger losses for short sellers.
Animation: A chart of a theoretical stock has the price rising with several “Buy to close" flags appear on the chart as the price rises.
Narrator: The Short Interest Ratio estimates how many days it would take for the short sellers to cover their positions. In this case, it could take 2.2 days. Schwab also calculates the difference in the short interest ratio over the last month.
It's important to pay attention to the date at the bottom of the widget because it tells you the last time these numbers were updated. In this example, it was January 31 of 2024, which was nearly a month ago. So, the numbers could've changed significantly since then.
There are also a couple of features in the Research tab's Watchlist section 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 click Edit columns. Next, I'll scroll down to the Short sale data and select each box. Then I'll click Next and finally Save.
Under the Custom View tab, there are two new columns: Short Sale Availability and Short Sale Borrow Rate. 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 adhere to a plan that defines when to open and close the trade. Take some time and review your overall trading objectives and risk appetite before you consider shorting stock.
On-screen text: [Schwab logo] Own your tomorrow®
