Unlocking the Bear Market: Your Comprehensive Guide to Short Selling on E*TRADE
Ever looked at a stock and thought, "That's going down"? While most investing focuses on buying low and selling high, there's a powerful strategy that allows you to profit when prices fall: short selling. It's a more advanced technique, but with the right understanding and platform, it can be a valuable tool in your trading arsenal. And if you're an E*TRADE user, you're in luck, as their robust platform provides the tools you need.
But before we dive into the nitty-gritty, let me ask you: Are you ready to challenge the conventional wisdom of "buy and hold" and explore the exciting, yet inherently risky, world of profiting from market declines? If so, buckle up, because this guide will walk you through every step of short selling on E*TRADE, from setting up your account to managing your positions.
 |
| How To Short Sell On Etrade |
Understanding the Core Concept: What is Short Selling?
Before we jump into the E*TRADE specifics, it's crucial to grasp the fundamental idea behind short selling. Imagine you believe Stock XYZ, currently trading at $100 per share, is overvalued and likely to drop to $80. Here's how short selling works in theory:
Borrowing: You borrow shares of Stock XYZ from your broker (E*TRADE, in this case). These shares are typically from other investors who hold them long in their margin accounts.
Selling: You immediately sell these borrowed shares on the open market at the current price of $100. The proceeds from this sale are credited to your account.
Waiting (and Hoping!): You wait for the price of Stock XYZ to fall. Let's say it does, to $80.
Buying Back (Covering): You then buy back the same number of shares of Stock XYZ from the open market at the lower price of $80.
Returning: You return the bought-back shares to your broker, fulfilling your obligation to them.
Profiting: Your profit is the difference between the higher price you sold them for ($100) and the lower price you bought them back for ($80), minus any fees and interest. In this example, that's $20 per share.
Conversely, if the stock price goes up, your losses increase, theoretically without limit. This is why short selling is considered a high-risk strategy.
Step 1: Laying the Foundation – Open and Fund Your Margin Account
To engage in short selling on E*TRADE, a standard cash account won't cut it. You must have a margin account. This is because you are essentially borrowing securities, and a margin account provides the framework and collateral for this borrowing.
Sub-heading: Why a Margin Account is Non-Negotiable
A margin account allows you to borrow money from your broker to buy securities or, in the case of short selling, to borrow securities to sell. The funds and securities in your margin account act as collateral for these borrowed assets. E*TRADE, like all brokers, has specific margin requirements (initial and maintenance margin) that you must meet and maintain.
Sub-heading: How to Open and Fund Your E*TRADE Margin Account
Log In or Sign Up: If you don't already have an E*TRADE account, visit their website (us.etrade.com) and begin the account opening process. If you have a cash account, you'll need to apply for margin privileges.
Navigate to Account Opening/Upgrading: Look for options like "Open an Account" or "Upgrade Account" within your E*TRADE dashboard.
Select Margin Account: Choose the option to open a margin account or add margin to an existing brokerage account.
Complete the Application: Be prepared to provide personal information, financial details, and investment experience. E*TRADE will assess your eligibility for margin based on regulatory requirements and their internal policies.
Understand Margin Disclosures: Read all disclosures carefully. These documents explain the risks associated with margin trading, including margin calls and the potential for unlimited losses.
Fund Your Account: You'll need to deposit funds into your margin account. The initial margin requirement for short selling is typically 150% of the value of the short sale. For example, if you want to short sell $10,000 worth of stock, you'll need at least $15,000 in your account ($10,000 from the short sale proceeds + $5,000 as the initial margin requirement).
It's crucial to have sufficient capital to meet both initial and maintenance margin requirements. Falling below maintenance margin can lead to a margin call, where you'll be required to deposit more funds or ETRADE may liquidate your positions.*
Step 2: Strategic Stock Selection – Identifying Your Short Target
Tip: Rest your eyes, then continue.
This is arguably the most critical step in short selling. Picking the wrong stock can lead to significant, even unlimited, losses. Short selling is not for the faint of heart or for those who don't conduct thorough research.
Sub-heading: What Makes a Good Short Candidate?
Look for companies with:
Overvalued Fundamentals: This could include high P/E ratios compared to peers, declining revenue or earnings, poor balance sheets, or unsustainable business models.
Negative Catalysts on the Horizon: Upcoming regulatory changes, negative earnings reports, product recalls, increased competition, or management shake-ups can all be triggers for a stock decline.
Weak Technicals: The stock's price chart might show a clear downtrend, breaking below key support levels, or forming bearish chart patterns.
High Short Interest (with Caution): While a high short interest can sometimes indicate a potential short squeeze (where the stock price unexpectedly rises sharply as short sellers cover their positions), it can also signify widespread bearish sentiment that could lead to further declines. Proceed with extreme caution here.
Sub-heading: Utilizing E*TRADE's Research Tools
E*TRADE offers a suite of research tools that can aid your stock selection:
Stock Screeners: Use E*TRADE's robust stock screener to filter companies based on financial metrics, technical indicators, and industry. Look for criteria that align with your bearish thesis.
Analyst Reports: Access third-party analyst reports and E*TRADE's proprietary research to gain insights into company fundamentals and future outlooks.
News and Market Data: Stay up-to-date with breaking news, earnings announcements, and economic data that could impact your target stock.
Charting Tools: Use E*TRADE's advanced charting capabilities to analyze price trends, volume, and technical indicators to confirm your bearish outlook.
Step 3: The "Locate" Requirement – Ensuring Borrowable Shares
Before you can place a short sell order, your broker (E*TRADE) must have a "reasonable belief" that the shares can be borrowed and delivered. This is known as the locate requirement under Regulation SHO by the SEC, designed to prevent "naked short selling" (selling shares you haven't actually borrowed or located).
Sub-heading: How E*TRADE Handles the Locate
Generally, when you attempt to place a short sell order on E*TRADE, their system will automatically perform the "locate" function for you.
Easy-to-Borrow (ETB) List: E*TRADE, like other brokers, has an internal "easy-to-borrow" list of securities readily available for shorting. If your target stock is on this list, your order will likely go through without issue.
Hard-to-Borrow (HTB) List: If a stock is in high demand for shorting or has limited availability, it might be on a "hard-to-borrow" list. These stocks may be more expensive to borrow (higher interest rates) or even unavailable for shorting at certain times. E*TRADE may display a message if a stock is hard to borrow or if borrowing fees are significant.
You typically won't see ETRADE's full internal hard-to-borrow list, but the platform will indicate if a stock is unshortable or has special conditions.*
Step 4: Executing Your Short Sell Order
Once you've identified your target and confirmed borrowable shares, it's time to place the order.
QuickTip: A short pause boosts comprehension.
Sub-heading: Navigating the E*TRADE Trading Platform
Log In: Access your E*TRADE account online or through their mobile app.
Search for the Stock: Type the ticker symbol of the stock you wish to short into the search bar.
Initiate a Trade: Click on the "Trade" button or similar option.
Select "Sell Short" as Order Type: This is the crucial step. Instead of selecting "Buy" or "Sell," you'll choose "Sell Short" from the order type dropdown menu.
Enter Quantity: Specify the number of shares you want to short. Remember, this directly impacts your potential profit or loss.
Choose Order Type (Limit vs. Market):
Market Order: This will execute your trade immediately at the best available current price. Be cautious with market orders when shorting, especially with volatile stocks, as the price can move against you quickly.
Limit Order: This allows you to specify the maximum price at which you are willing to sell short. Your order will only be executed if the stock can be sold at that price or higher. For short selling, a limit order is often preferred to control your entry price.
Review and Confirm: Double-check all the details of your order: stock symbol, quantity, order type, and price. E*TRADE will usually provide an estimated commission and an overview of the potential impact on your margin.
Submit Order: Once you're confident, submit your short sell order.
Step 5: Monitoring Your Short Position – The Vigilant Bear
Short selling requires active monitoring. Unlike long positions where your maximum loss is your initial investment, short positions have theoretically unlimited upside risk. If the stock price keeps rising, your losses can mount indefinitely.
Sub-heading: Key Metrics to Watch
Stock Price: Constantly monitor the current price of the stock you've shorted.
Maintenance Margin: Ensure your account maintains the required maintenance margin set by E*TRADE. If the stock price rises, the value of your short position increases, which in turn increases your margin requirement.
Borrowing Costs/Interest: Remember that you are paying interest on the borrowed shares. These costs can fluctuate based on supply and demand for the stock. E*TRADE will provide details on these fees.
News and Catalysts: Stay informed about any news, reports, or events that could impact the stock's price.
Sub-heading: Risk Management Strategies
Stop-Loss Orders: This is your best friend when short selling. A buy-stop order will trigger a market order to buy back the shares if the stock price rises to or above your specified stop price. This helps limit your potential losses. For example, if you shorted at $100 and set a buy-stop at $105, your position would be covered if the stock hits $105, limiting your loss to $5 per share (plus fees).
Be aware that a stop-loss order becomes a market order once triggered, meaning it might not execute at the exact stop price, especially in volatile markets.
Trailing Buy-Stops: This is an even more dynamic stop-loss. It sets a stop price that "trails" the lowest price of the stock by a specified percentage or dollar amount. As the stock price falls (which is what you want), your trailing stop also moves down. If the stock then reverses and rises by the trailing amount, your buy-stop is triggered.
Position Sizing: Never allocate too much of your capital to a single short position. Diversify your short bets and manage your risk exposure carefully.
Step 6: Covering Your Short Position – Locking in Profits or Limiting Losses
To close out a short position, you need to buy back the same number of shares you initially borrowed and return them to the lender. This is known as "covering the short."
Sub-heading: How to Cover on E*TRADE
Log In: Access your E*TRADE account.
Locate Your Short Position: Go to your portfolio or positions tab to find the stock you've shorted.
Initiate a Trade: Click on the "Trade" button associated with that position.
Select "Buy to Cover" as Order Type: This is the key. You're buying shares, but specifically to cover your existing short.
Enter Quantity: Specify the number of shares you want to cover.
Choose Order Type (Limit vs. Market):
Market Order: This will execute your trade immediately at the best available current price.
Limit Order: This allows you to specify the maximum price at which you are willing to buy back the shares. Your order will only be executed if the stock can be bought at that price or lower. For covering shorts, a limit order helps you lock in profits at a specific level.
Review and Confirm: Double-check all the details.
Submit Order: Once you're ready, submit your "buy to cover" order.
Sub-heading: When to Cover
Profit Target Reached: If the stock has fallen to your anticipated price target, it's time to take your profits.
Loss Limit Reached: If the stock is moving against you and hits your stop-loss, cover immediately to prevent further losses. Emotional trading is particularly dangerous with short selling.
Change in Thesis: If the fundamental or technical reasons for your short position no longer hold true, it's prudent to close the position.
Margin Call: If you receive a margin call, you must act quickly to either deposit more funds or cover your position to avoid forced liquidation by E*TRADE.
Important Considerations and Risks of Short Selling
QuickTip: Revisit this post tomorrow — it’ll feel new.
While potentially lucrative, short selling comes with significant risks that you must fully understand.
Unlimited Loss Potential: This is the most critical risk. When you buy a stock, your maximum loss is 100% of your investment (if it goes to zero). When you short a stock, there's no theoretical limit to how high the price can go.
Margin Calls: If the stock price rises and your account equity falls below the maintenance margin, E*TRADE will issue a margin call. You'll need to deposit additional funds or your positions may be liquidated, often at unfavorable prices.
Short Squeezes: A sudden and rapid increase in a heavily shorted stock's price can force short sellers to buy back shares to limit losses, further driving up the price and exacerbating losses. This can happen due to unexpected positive news, a sudden shift in market sentiment, or coordinated buying activity.
Borrowing Costs (Interest): You pay interest on the borrowed shares for as long as your short position is open. These costs can add up, especially for hard-to-borrow stocks, and eat into your profits.
Dividends: If the company you shorted declares a dividend while you hold the short position, you are obligated to pay that dividend to the lender of the shares. This is an additional cost.
Liquidity Issues: For thinly traded stocks, it can be difficult to find shares to borrow or to cover your position at a reasonable price.
Timing the Market: Short selling requires precise timing. Stocks can remain overvalued for extended periods, and even fundamentally weak companies can experience temporary price surges.
Conclusion: Short Selling as a Strategic Tool
Short selling on E*TRADE can be a powerful strategy for sophisticated traders who are willing to do their homework and understand the inherent risks. It allows you to capitalize on declining markets, diversify your portfolio, and even hedge existing long positions. However, it is not for beginners or those with a low-risk tolerance. Always approach short selling with a well-defined strategy, robust risk management, and a deep understanding of the market dynamics at play.
Frequently Asked Questions (FAQs) about Short Selling on E*TRADE
Here are 10 common questions about short selling on E*TRADE, with quick answers:
How to open a margin account on E*TRADE for short selling?
To open a margin account on E*TRADE, you can apply online through their website or mobile app by selecting the "Margin Account" option during the application process or by upgrading an existing cash account.
How to find stocks that are good candidates for short selling on E*TRADE?
You can use E*TRADE's stock screeners to filter for companies with weak fundamentals, negative growth trends, or bearish technical patterns. Additionally, review analyst reports and news to identify potential negative catalysts.
How to check if a stock is borrowable for short selling on E*TRADE?
When you attempt to place a "Sell Short" order on E*TRADE, their system will automatically perform the "locate" check. If the shares are easily borrowable, the order will proceed; otherwise, you may receive a message indicating it's hard to borrow or unavailable.
Tip: Reflect on what you just read.
How to place a short sell order on E*TRADE's platform?
Log in to E*TRADE, search for the stock, click "Trade," select "Sell Short" as the order type, enter the quantity and desired price (preferably a limit order), then review and submit.
How to set a stop-loss order for a short position on E*TRADE?
After placing your short sell order, you can set a "Buy-Stop" order (or "Trailing Buy-Stop") from your positions tab or the order entry screen. This order will automatically trigger a buy to cover if the stock price rises to your specified level.
How to calculate the potential profit or loss on a short sell on E*TRADE?
Profit/Loss = (Short Sell Price - Buy to Cover Price) x Number of Shares - (Borrowing Costs + Commissions + Dividends Paid). Remember, losses are theoretically unlimited if the stock price rises indefinitely.
How to cover a short position on E*TRADE?
To cover a short position, go to your portfolio, select the shorted stock, click "Trade," choose "Buy to Cover" as the order type, enter the quantity, and then review and submit the order.
How to manage margin calls when short selling on E*TRADE?
If you receive a margin call, E*TRADE will notify you. You must either deposit additional funds into your margin account or close out some or all of your short positions to bring your equity back above the maintenance margin requirement.
How to understand the borrowing costs and fees associated with short selling on E*TRADE?
E*TRADE will display the estimated borrowing costs (interest) when you place a short sell order, and these costs will be reflected in your account statements. These fees fluctuate based on the demand and supply of the stock for borrowing.
How to identify and avoid common risks of short selling on E*TRADE?
To avoid risks, always use stop-loss orders, manage your position sizing, conduct thorough research, avoid shorting highly volatile or thinly traded stocks, and be aware of potential short squeezes and dividend obligations.
 |
