How to Short Stocks

While long investors hope for a rise in the price of a stock, short sellers expect a decline. It’s not a simple trade, and it requires advanced knowledge of the market, research and analysis. It also comes with additional rules, risks and expenses that aren’t associated with regular self-directed brokerage accounts like TFSAs or RRSPs (which allow only purchases with the cash you’ve put in). How to Short Stocks.

When you “go short,” or sell a stock you don’t own, you borrow shares from your broker and then sell them into the market, expecting that they will fall in value so you can buy them back at a lower cost. The difference in prices is your profit. If a stock soars instead of falling, you can face unlimited losses that may wipe out any other gains in your portfolio.

How to Short Stocks: A Beginner’s Guide

In order to short stocks, you need a margin account, which allows you to borrow securities. A standard margin requirement is 150% of the total value of your short position.

You place a sell order for shares that you don’t own as you would with any other stock, and most brokers won’t differentiate between regular orders and ones placed to go short. You pay a “cost of borrow” fee, which is often a few percent per year on the total loan, and you’re on the hook for any dividends paid out during the time you’re shorting the stock. In addition, you may be called upon to close your short position and buy back the shares you borrowed if your lender wants them returned.