Question abut short selling a stock?

Question

If I want to short sale a stock and the company goes bankrupt do I still make a profit until it hits zero? I use TD Ameritrade for buying and selling stocks can I short a stock with them? anyone know of a good place I can get info on how to do this?

Thanks!

Answer 1

Yes, you can short at TDAmeritrade if you have a margin account. The way you make money on a short sale is for the price to go down, and then you buy back the stock (which is called "covering" the short) at a lower price than you sold it for. So if you short 500 shares at $10, you get $5000 (minus commission and fees). If the price goes down to $5 and you buy it back (for $2500 + commission), you keep the difference (a little under $2500) as profit. If the company goes bankrupt, you get to keep it all as profit.

All you have to do to sell short at Ameritrade is pick the "sell short" transaction type when entering your order.

The cash you get for the sale goes into a line on your Account Balance page which is labelled "Short Balance". You have to keep that money in there and it doesn't earn interest. (You might be able to take some out, but then I think you'd be borrowing that money at margin interest rates. I've never done that, so I'm not really sure how that works.)

After the trade settles (3 market days), there will be a "mark to market" transaction every market day to adjust your short balance to match what the current value of the stock is. If the price has gone down, the profit you've made is automatically transferred to the Cash balance of your account. If the price has gone up, money is taken from the Cash balance to bring the Short Balance up to the amount it would take to buy back the stock. If you don't have enough in your Cash balance (or Money Market), it's taken from your margin balance (and I assume you then have to pay interest, so you need to keep a close eye on the stock price if you want to avoid paying margin interest).

Remember that shorting is risky. If that $10 stock you sold suddenly gets a buyout offer for $16, which can happen, you need to come up with the extra $3000 from somewhere.

Answer 2

Yes, you make money all the way down. You will need a margin account to short. You should be able to short at TD Ameritrade.

Answer 3

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