When people have money above their lifestyle needs (and wants) available for other uses, they may choose to invest for the opportunity to generate higher returns on their money. this money can accumulate given enough time in the market and result in significant returns as stock markets rise.
However, not all wealth in the stock market comes from ordering your investment decisions in the flow of buy low and sell high. in fact, the opposite can also be true: sell high and buy low, as is the case with short-selling stocks.
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This practice carries inherent and acute risk, as you have bet that the company’s stock will go down rather than up. In a short sale, your results are limited by two options:
- finite gains (shares can only go to $0)
- infinite losses (stock price can go up forever)
Some investment platforms allow short selling of stocks, bonds, index funds and other assets, while others do not. Two popular investment apps that have come on the market in recent years are robinhood and webull.
This post explores the ability to short stocks on these two millennial-friendly investing apps [including whether you can short stocks on Robinhood at Robinhood and Webull] and how to do it. spoiler: webull allows you to short stocks while robinhood does not.
what is a short sale?
When investors short, or “short” a stock, market, or other asset, they have placed a bet that the price of the asset will go down.
When short selling, an investor uses a margin account to open a position by borrowing shares of a stock or other asset that the investor believes will decline in value at a predetermined future date: the expiration date.
This is the date the asset must be returned to the lender for the amount borrowed.
The investor will pay interest on this loaned asset as compensation to the lender. the investor executes the trade by selling these borrowed shares at the current market price to investors willing to pay this price.
At this point, the investor faces the obligation to return those shares to the lender before the due date, but also expects to repurchase the same number of shares for a lower value by returning them.
in effect, the investor has bet that the price will go down and will then have the ability to repurchase the asset at a lower price. once repurchased for less, the investor returns the same amount to the lender for less, recovering the difference as profit.
→ short sale example
Imagine a trader who believes that ABC shares, currently trading at $100, will drop in price in the next two months.
Perhaps identified through investment research software, the trader borrows 100 shares of ABC from a broker and sells them to another investor for $10,000 (100 shares * $100/share). The trader has now “shorted” or can be considered as “shorting” 100 shares of ABC.
This happens because they sold the shares they didn’t own but borrowed.
This short sale occurred as a result of borrowing the stock from the broker, something that is not always possible if many other traders are also shorting the stock, limiting the availability of stock to borrow and short.
After a month passes, ABC Company reports poor financial results below market expectations, causing the stock value to drop significantly to $80 per share (a 20% decline).
trader decides the time is right to “close the short position” by buying 100 shares of abc for $80/share ($8,000 total) on the open market and then returning the borrowed shares to the broker.
The trader made a profit of $2,000 on the short sale (excluding commissions and related interest paid on the margin account). specifically, $100/share – $80/share * 100 shares = $2,000 profit.
Conversely, if the trader made a bad bet and abc reported better than expected results and the price went up 20%, he would have lost money on the position.
Specifically, they would have lost $2,000 (not including fees and interest). $100/share – $120/share * 100 shares = $2,000 loss.
Shorting is a highly speculative trading strategy as the risk of loss on a short sale is theoretically infinite because the price of any asset can go up to infinity.
On the other hand, short selling has a return asymmetry because the short seller can only make a finite profit as a result of the stock only having the ability to decline to $0.
For a simpler illustration of how short selling works, take a look at the short selling infographic below.
Can You Short on Robinhood?
In the scenario described above under the generally accepted definition of stock shorting, robinhood does not allow this trading ability.
It is currently not possible to short stocks on robinhood, even with a robinhood gold membership, robinhood’s premium subscriptions that allow investors to use margin to take advantage of returns. instead, you should use reverse ETFs or put options.
Instead, you should consider opening an account with webull, a platform that allows short selling.
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However, if you would like to see alternative methods of profiting from a stock drop on robinhood, see the next section.
→ how to short a stock on robinhood with reverse etfs
Currently, the only methods to short stocks on robinhood come from the use of inverse etfs available on robinhood or through options trading. short selling on robinhood would require both of these trading strategies to profit from the fall in the price of an asset.
Some popular robinhood reverse ETF options include:
- proshares ultrapro short qqq (sqqq) – 3x inverse
- proshares short s&p 500 (sh) – 1x inverse
Note that these two inverse index funds that robinhood has available come with higher average associated expense ratios and also invest with the objective that the market indices they follow will go down in value.
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in addition, the ultrapro short qqq index moves three times in magnitude inversely to the corresponding index (nasdaq, or the normal qqq index fund).
In other words, this inverse ETF would experience a 3% return (not including the underlying expense ratio and tax consequences) if the Nasdaq Composite Index declined by 1%.
Similarly, it would decline 3% if the Nasdaq Composite rose 1%. Be aware of this risk exposure with short robinhood trading in inverse ETFs.
→ how to buy put options on robinhood
Another strategy is through the use of options trading, discussed here in more detail. In short, by betting on a stock price falling, you can either sell call options or buy put options. more complex strategies exist and are beyond the scope of this article.
These time-sensitive securities give the owner the right (but not the obligation) to sell a fixed number of shares at the price of the underlying share at a predetermined amount.
This price, known as the exercise price, remains a price at which the holder can exercise the put option until a specific date in the future.
step 1. select your stock option
once you find the security you’d like to short on robinhood, click the ‘trade’ button and then the ‘trade options’ button that appears. below, I use google share (alphabet) as an example.
The application will then take you to a screen showing the available options (buy or sell call or put options).
To profit from a stock price decline, you will need to buy put options or sell call options.
step 2. choose expiration date, buy/sell and buy/sell designations
In this step, you will need to choose the expected expiration date that you would like to trade options on robinhood. because we want to go short on the robinhood app, we would need to buy a put option or sell a call option.
This example only contemplates the purchase of a put option. Once selected, the screen will show you the available put options for that expiration date, as well as the most recent option and strike prices.
After selecting the date, you will need to choose whether to buy or sell a call or put option. following the purchase of put options, the application will also show you the current breakeven price for each put option.
This is the price the stock must fall to for you to get back the premium you paid.
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step 3. select the number of contracts to buy
after going through the screen above to select the specific put option to short the target stock, you will need to indicate how many contracts you intend to buy (one contract represents 100 shares of the underlying stock) and the maximum price you would pay pay.
robinhood then calculates your anticipated trading cost and asks you to review your decision before submitting. If you don’t have enough funds in your account, you need to make a deposit like the screen below.
can you short sell on webull?
yes. webull, unlike robinhood, allows traders the ability to short stocks. However, WeBull has short selling restrictions and requirements that traders must meet before shorting shares on WeBull. principally, webull stipulates that merchants must:
- have a margin account with webull
- maintain a net account value of $2000 or more
This robinhood alternative also allows for the same opportunities to profit from a security’s decline in value as robinhood. You can buy inverse etfs on webull or use various options strategies to capture value in an asset’s falling price.
how to short stock on webull
Once you meet the webull short sale requirements above, you may proceed to short sale shares in webull.
As a reminder (and in case you skipped the explanation above), when you place a short order on webull, the company acts as a broker on your behalf to “borrow” another investor’s shares, opening your short position and sell these borrowed shares in the market at the current price.
when ready to close your short position (or must due to a margin call), webull then “buys back” those shares on the open market and returns them to the lender.
after closing your short position, you get the difference between the price you initially sold the shares short at and then the price you bought them back at in the market. if you sold at a higher price than you bought, this difference is your profit. if you sold for less than you bought, you realized a loss.
Below are the specific steps on how to short sell stocks on webull.
- step 1: go to the “watch list” tab on the main screen
- step 2: search for an action and select it by tapping it
- step 3: verify that a purple down arrow icon appears at the top right of the individual action page
- step 4: if the icon appears, you can short this stock on webull
- step 5: tap the ” exchange ” at the bottom left
- step 6: select “sell” as the order address
- step 7: Please complete all required fields shown on this order submission screen
- Step 8: Submit the sales order and wait for it to complete
- step 9 : if the order is filled, go to the “home” tab to see the execution of your order
- step 10: the short position will show up in your “position” section as a negative amount
what are webull’s short selling fees?
When selling shares short on webull, you will need to borrow a company’s shares before you can sell them. therefore, the cost associated with a short sale on webull is the loan fee paid for shares of this company in a margin account.
The margin loan rate on the shares loaned changes daily based on prevailing market conditions. This margin interest is a method for how webull makes money.
Just like you would calculate interest on margin trading, the shorting fee at webull is calculated daily (and charged monthly) according to the following formula:
daily margin interest (short position) = (daily market value of shares borrowed at market close * share lending rate for that stock) / 360 days
how to open a webull account
Now that you know that webull can be used to short stocks, consider opening an account with the best free stock trading app and follow the steps to sell stocks in short described above. you will receive free shares with a nominal initial deposit.
Click the link below to start your registration process and add funds to explore the world of short selling at webull.
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How are short sales regulated?
The Financial Industry Regulatory Authority, Inc. (FINRA) enforces rules and regulations around short selling to ensure that investors and broker-dealers adhere to the Required maintenance margins that must be followed for margin accounts.
in addition, the new york stock exchange (nyse) and the federal reserve establish and supervise the minimum values for the amount of funds that must remain in margin accounts, which is known as as a maintenance margin.
In the event that an investor’s account balance falls below the required minimums, the investor receives a margin call indicating that more funds must be deposited or the position will be liquidated by the broker.
pros and cons of short selling
As mentioned above, short selling can result in an expensive decision if the trader makes the wrong bet on the direction a stock will trade. in the reverse scenario, when a trader buys a stock, the maximum loss reaches 100% of the capital put at risk as the stock price moves to $0.
However, when a trader shorts a stock, the potential loss may result in more than the initially invested capital. Because there is no cap on the price of a share, realized losses can be unlimited.
in the event of a short downturn, or when a very short stock rises sharply, usually in response to a positive development in the company’s financial circumstances.
This news may force short sellers to close their positions quickly, adding a significant amount of upward pressure (hence the name, “short squeeze”) to the share price. in turn, this quick move “squeezes” short sellers out of their positions.
Compounding the pain even further is the interest paid on the borrowed shares in the trader’s margin account. Even in a situation where the trader profited from the falling stock price by shorting, the overall profit would still reflect the cost of interest margin.
short sale professionals
- potential for high earnings with little (relative) capital investment
- possibility of leveraged investments
- hedging against other holdings
cons of short selling
- potentially unlimited losses
- margin account required
- margin interest incurred
- short squeezes
As an added complication to shorting stocks, when it comes time to close a short position, it can be difficult to find enough stocks to cover or buy to close.
This typically occurs when multiple short sellers are looking for stocks to buy and closing their positions at the same time, as is the case with a short crunch described above.
Conversely, short selling can offer the prospect of a high-risk, high-reward scenario in a market defined by a move lower.
If the short seller can correctly predict a stock’s downside movement and make the appropriate short sales to capture this belief, they can earn a good return, especially considering that margin lending allows for more capital to be used than margin lending. initial margin contribution on the account.
using margin provides leverage, meaning the trader didn’t need as much capital to make the same profit.
short selling as a hedging strategy
When most people think of short selling, they often equate it with pure speculation, or investing in stocks, property, or other companies in the hope of making a profit but at the risk of losing money. lose.
While true in many cases, many people also short for another useful purpose: hedging, or the act of taking a reverse position to offset the risk of loss.
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Investors want to manage risk and often employ hedging strategies to mitigate portfolio volatility, sometimes through short selling. hedging is primarily intended to protect portfolios as opposed to the pure profit motive seen in speculation.
Because hedging can have significant costs, many retail investors don’t consider it in normal times.
However, for more committed investors who understand what hedging (eg, shorting, using options, or buying inverse ETFs) can do for a portfolio over the long term, they have a keen eye for build wealth and protect it.
Investors can preserve their wealth by using hedging, especially in conjunction with these Best Investments for Young Adults:
- contribute to tax-advantaged investments,
- build passive income through income-producing assets,
- invest in index funds, and
- diversification into alternative investment options
Regarding the costs of following a hedging strategy, investors face two main costs:
- transaction costs to implement a hedge. this includes expenses associated with short selling (eg, margin) or, in the case of options, premiums paid for protection option contracts.
- opportunity cost of the portfolio. if the market moves higher (or against your underlying position), by hedging your portfolio, you have effectively limited the advantage of your wallet.
To illustrate the opportunity cost of using a hedging strategy, let’s consider a simple example involving buying a hedging product against the S&P 500 index. As a result of hedging, the portfolio of an investor now only trades with a 50% correlation to the s&p 500 (beta = 0.5).
This coverage now reduces volatility but also limits upside potential (and downside potential). this strategy would result in half the movement of the s&p 500 up or down or, for example, a 10% increase in the s&p 500 would result in a 5% increase in the value of the portfolio and vice versa.
short sales serve many purposes
If you use short selling to hedge positions or simply speculate, use it wisely. the ultimate goal must inevitably include long-term wealth creation.
As mentioned above, consider using this strategy as part of a broader effort to build and preserve your net worth. combine this with the best stock analysis tools.
Depending on your preferences and investment goals, both robinhood and webull offer the ability to take reverse positions or sell directly short. the former only offers inverse etfs and options strategies, while webull offers a more comprehensive set of short put options.
Getting started on either platform is no challenge, and setting up accounts costs nothing. Neither service charges commissions or maintenance fees, and both offer you a free share of stock to get you started.
Also, you can use both as micro-investing apps to start small with small amounts of money.
both allow swing trading and may allow day trading after meeting certain conditions.
It can be unnerving to short if you are not already an experienced investor. beginner trading apps do not allow novice investors to short sell without demonstrating market knowledge developed from formal education, work experience, following stock news and more.
Just be sure to invest money that you can save. Also, be sure to research and analyze stocks before making any investment decisions.
When you put in the initial work up front, your money will start working for you in the future and increase your net worth, another important factor in achieving financial independence.
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