Most traders are aware that trading stocks that go down can be as profitable, if not more so, than trading stocks that go up. But shorting a stock is not always as easy as buying the ask to go long.
In order to sell a stock short, you must first have access to borrowable shares of the stock. The more popular a stock is among short sellers, the more difficult it can be to borrow. When other shorts snatch up all the available shares, it can become difficult or impossible for you to short the stock at all.
Successful trading is all about timing, so devoting precious minutes locating stocks to short and determining whether or not there are shares available to borrow can be a costly process. That’s why Lightspeed has made it particularly easy for traders to immediately identify shortable stocks.
After logging into the Lightspeed Trader platform, users simply have to type in the stock ticker of their choice into the Quote box. Once the ticker is entered, a symbol will immediately appear in the upper right-hand corner of the Quote box. If a green box with the letter E appears, it means that the stock is relatively easy to borrow and is immediately available to short. Short sellers who get the green box have the go-ahead to place a short sale order.
If you see a gray box with the letter L instead of an E, that means your broker still needs to locate shares. This location process can be completed by requesting to locate the appropriate number of shares automatically in the Short Request window of Lightspeed Trader. Finally, if you get a red T, it means the security is unavailable to borrow and cannot be shorted.
Just because a stock is available to borrow doesn’t mean that it’s necessarily a good idea to short the stock.
In addition to the normal trading commissions, short sellers must pay borrowing costs for any shares they sell short. These costs tend to be higher the more difficult a stock is to borrow, so popular stocks can often be the most expensive to short. In extreme cases, stock borrowing costs can exceed 100 percent of the value of the short trade if the stock is extremely difficult to borrow.
In addition to borrowing costs, shorts are also responsible for paying margin interest on short trades and making any dividend payments paid out to their borrowed shares. Finally, short sellers can find themselves at the mercy of short squeezes and “buy-ins,” costly market phenomena which can occur if a heavily-shorted stock makes a large move higher.
Short selling is a tactic employed by people up and down Wall Street. The biggest thing to remember, however, is that shorting a stock opens you up to unlimited risk. So while it can be a profitable strategy, make sure you do it correctly.
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