What is Short Selling?

Short selling guide

Author: Jeff Park

Jeff is a professional trader with 17 years of market experience in day trading stocks, options, and futures. Jeff is the head trader at LiveStream Trading with a strong focus on a systematic trading process. He provides daily live trade walk-throughs, mentorship, and live trading education for his team members on a daily basis.

As we know a market is formed through buying and selling. Most people have the preconceived notion that in order to make money in the market you must buy low and sell high. But did you know you could sell high and buy low to profit on a stocks depreciation in value?

Short Selling is the act of betting against an underlying asset. The premise of short selling stocks is that you believe the stock will decline in price so you would like to bet on it to go lower.

The process begins by borrowing shares from your broker (in order to first possess the shares but not owning them) and sell the security at one price, to hopefully buy them back (also known as covering) at a lower price, profiting in the difference between the two prices.

Short Selling for Profit

With short selling, day traders especially have the ability to profit on both sides of the market, allowing for much more opportunity. Just like in any other style of trading, risk management is key, and with a proper trading process and system in place, short selling can be a very profitable endeavor.

In theory this can sound confusing, but its actually as simple as pressing the "short" button on your brokerages level 2 platform as opposed to pressing the "buy" button.

Once a short position is initiated in a stock, you will see your P&L increase with each down-tick if the stock if it goes lower, and decrease with each push higher.

In order to exit a short position (or "cover" a short position), you need to use the "cover" or "buy" button on your brokerages platform (as opposed to "sell" if you were in a long position).

How often do you see stocks run 50 -100%+ and think “I missed the whole move, I guess I will have to wait for the next runner"?

Ability to Play Reversals

Well, with short selling you have the ability to play the reversal move on these stocks that get too extended, which can offer enormous amounts of reward if timed properly and using a proper risk management system.

In theory, short selling has unlimited risk because a stock can go up infinitely, opposed to traditional buy and sell trading, which you can only lose what you put in.

However, with a proper trading strategy the risk can be minimal with the use of stop losses and timing points to enter the trade when longs are likely to begin selling or profit taking.

What Brokers can Offer

Other factors to keep in mind are that depending the products you choose to short, you may need to pay a fee to borrow the shares from your broker. For example, most brokers will offer shares of Apple (AAPL), Netflix (NFLX), and other higher market cap names for free, this is what is known as ETB (Easy to borrow).

That being said, once again, this is typically as simple as pressing a button on your trading platform to locate the shares you want to short and then hitting "accept" to reserve the shares to short. Once shares are reserved to short, you can simply use them whenever you want during that trading day (and you can short as many times as you want within that trading day with the specified amount of shares that you have borrowed).

Participating in Short Selling Small Cap Stocks

Although, if you want to participate in shorting small cap stocks (typically the stocks under $15 with a smaller float), there will be a fee to pay per share based on the clearing firm of the broker, this is what is known as HTB (Hard to borrow). To continue along the line of HTB stocks, it is essential that if you know you’d like to participate in shorting smaller cap stocks, you must have a broker that will actually have shares to lend to you.

Your typical TD Ameritrade, Fidelity, and Schwab will most likely not offer the shares you are seeking. This is why at Livestream Trading we highly recommend Trade Zero, a reliable broker who offers world class customer service, executions, cheap commissions (even free if you add liquidity), and access to HTB stocks with the ability unlike any other broker to sell your located shares back for a credit.

It is absolutely essential as a day trader to have access to all the tools you need to make money. Being able to play both long and short on any stock is key.

Short Selling can be Risky

Once shares are reserved, you can use them as many times as you want through the trading day with no additional charges other than normal commissions (Keep in mind some brokers charge overnight borrow fees for swinging your short position) All in all, Short selling can be risky by nature but with a safe trading system like the one we use in our day trading chat room that offers specific timing points, low risk entries, and an 80%+ win rate, it can be much more profitable than going long. Furthermore, with the top of the line software and tools like Trade Zero and TC2000, we will help equip you with all you need to be proficient and profitable tackling the markets from the other side of the trade.


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