Shorting stocks?

Question

I think get the basic idea, but have a few questions on a more detail level. When you approach a broker to borrow stocks you don't tell them "I'm going to short X, so lend me 100 X," right? How do you do it? I suppose there must be a fee to borrow? Will they look into your credit before they lend? If they think that the stock will go down as well, would they still lend that stock to you? Can you do it with online brokers? Is there a time limit on when the stocks need to be returned? What is an uptick and zero-plus tick?

Answer 1

You are getting too caught up in the back office mechanics. You don't need to know the mechanics of an engine to drive a car.

An uptick is a positive change in price; a sale/purchase of stock at a higher price than previous. You must sell short on an uptick.

These days, there is no need to ever talk to a broker at all. You just click on the Short Sell button, and if you've set it up properly in a margin account with sufficient funds, and the stock is marginable, the trade will go through. Once set up, you don't "ask" for anything, you just trade it, and the back office takes care of the borrowing and the receipts behind the scenes. Neither do you "ask" to go Long. That has already been set up too.

There is an interest charge for borrowing, and if you are short the stock during dividend time, you will have to pay that.

You can hold the short until the cows come home or until it is called, but at some time, you must buy it back, according to the contract.

Answer 2

It's like buying a stock, but in reverse. No time limit, no extra credit check or references.

Selling short means you borrow stock from the broker and sell it first at the (hopefully) higher price.

And then, instead of hoping it goes up, you want the stock to go down. At that point, you buy the stock back at the lower (hopefully) price and return the shares to the broker.

The difference in price minus commissions is your profit/(loss).

The borrowing part is done behind the scenes, so no worries there. The only time you'll have trouble is if your broker is tiny.

The only stipulation is the uptick where you usually have to wait for the stock to trade at the same price or higher to enter. See details here:
http://en.wikipedia.org/wiki/Uptick_rule

And yes, online brokers is the easiest way to go! There's usually even a button to push to sell short. Just be sure to use a decent one like E*Trade, Ameritrade, Optionsxpress, Scottrade, and so on.

Hope that helps!

Answer 3

Yikes, that first guy is backward - if you're short and the stock falls you're in good shape, its when it runs that you're in trouble.

For a retail investor such as yourself the brokerage firm, or their clearing firm will maintain a list of securities that are 'hard borrows'. If you want to short one of those sombody at the clearing firm will have to affirm that they have the shares available, and yes, you will have to tell them 'I want to borrow 100 x'. Most stocks aren't that difficult to borrow, and if its a shortable stock (it has to be marginable to be shortable) and its not on the hard borrow list you shouldn't have any trouble just putting the order through. "Credit" is based on the cash in your account, there are minimum margin requirements set by the Fed, but your broker likely has some tighter ones, so check with them.
They will still lend you stocks if they think they will go down - major clearing firms have stock lending departments whose sole job it is to lend and borrow stock between other clearing firms.
Yes you can do it with online brokers, at least all the ones i've seen.
There is no time limit, but if the stock becomes heavily shorted and T+3 deliveries become a problem for those that are selling stock long you could get bought-in, the broker will force you to cover the position at market prices, regardless of a gain/loss to you. It can be risky, but if you keep a reasonable stop you can limit your losses.

Answer 4

You got some great answers to the bulk of your questions. I'll answer the one that hasn't been covered - a Zero-Plus Tick.

As stated earlier, an up tick is just a stock closing higher. If it closed yesterday at $20 and closes today at $20.25, that's an up tick. A Zero Plus Tick is when a stock closes unchanged from it's last trade, but higher then the trade prior to that. For example. If the stock closed Friday at $20, on Monday at $20.25 and Today at $20.25, the last trade is a Zero Plus tick. In a nutshell, the last price has to be equal to the the last trade and higher then the trade prior to the last trade.

Answer 5

George Coswello has it completely backwards. If the stock decreases in value, the call options will be worth less, as they are the right to buy the stock at a set price. If volatility goes up, then the call options would be worth more - this is one of the price determinants in the Black Scholes model. For put options, a decrease in stock value causing the puts to be worth more, as puts give the owner the right to sell the stock at a set price. Puts would also increase in value with an increase in the stock's volatility - same reason as for the calls.

Answer 6

Shorting stocks are Veeery risky. You can short just about anything, for just about any amount. As long as you can prove that you have the colateral to back it up. If your stock falls, you have to put up cash to cover it. If it rises, nothing happens. Sure you can make a lot of money shorting stocks, but you can also loose everything with one-- false-- move. Shorting stocks are risky, even to the professional investor. I recomend you start out small, open an online trading acount and stay away from margin. Avoid it like the plague, and build a more respectible portfolio first before you start throwing in risky investments like short stocks. Good luck buddy. Just remember JPMorgan started out just like you and I have.