Steps to Take When Short Selling Stocks
The first thing you have to do when short selling stocks is make sure you have the right type of brokerage account. The type you will need is called a Margin Account.
To find out a bit more why you will need this type of account, read more on my Understanding Short Selling page. To keep up with this page here, know that a margin account will be required.
If you don't have margin approval on your account, it is a matter of filling out a few more forms and submitting them to be approved and added to your existing brokerage account.
When entering into a short position, or short selling stocks, you will need to place an opening order.
In the more commonly traded long stock position, the opening order is when you place an order to "Buy" a certain number of shares of a stock. Then when you close out the trade, you place an order to "Sell" the same number of shares you originally purchased.
When short selling stocks, the trades are done in the opposite order as above. To open a short position, you first place an order to "Sell" a certain number of shares of stock. Then when you go to close out your short position, you place an order to "Buy" the same number of shares you originally sold.
Sometimes you will see slightly different wording used such as "Sell Short", "Sell to Open" or "Short". These mean the same thing. You will also see "Buy to Cover", Buy to Close" or "Cover" used, and these also mean the same thing. Be sure to double check with your brokerage firm, but this is what I have seen using different accounts myself.
Be sure to read about the following related topics also on this website:
- Introduction to Short Selling
- Shorting Stocks: Examples
- The Uptick Rule
- Naked Short Selling
- High Short Interest Stocks
The first image below is an example of an opening Trade Ticket screen for a short position with an account at Zecco.com. The usual order screen is wider than this, I have cut the screen in half in order to make it fit on this page. The same information is shown though.
You can see that they use the term "Short" for the opening trade. In addition to selecting, "Short", you must enter the number of shares, the stock symbol, the order type (meaning Limit Order, or Market Order in this case), the Limit Price if a Limit Order is being used, the duration of the order to stay active, and you can also select the little AON button (which stands for "All or None").
Once you have entered everything, you can then preview your order to make sure you entered everything correctly. If everything looks okay on the preview screen, that's when you submit the order.
The next image shows an example of the closing trade ticket for a short position with Zecco.com. You can see that they use the term "Cover". The remaining times to fill in or select are explained the same as above. The only difference would be the "Limit Price in this case. When "Covering" a short position, this would be the price that you are willing to buy the shares of stock at.
So in this example, if you originally sold short shares of MSFT at $19.10 you would have to "Cover", or Buy to Close the same amount of shares of MSFT at a price less than $19.10 to make a profit (not counting commissions).
For example, if you sold short 100 shares at $19.10 and "Covered" your 100 shares at $18.10 as shown in this image, you would have made $100 before commissions. 100 shares x $1.00 per share= $100.
If the price went the wrong way on your position and went higher, and you "Covered" your position at $20.10 you would have lost $100 plus commissions.
So when short selling stocks, the goal is to sell high first when opening the trade and buy low second to close the trade to make a profit.