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How to Short Stocks the Smart Way (2020)

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I often get asked why I can’t short with my account. There’s a couple reasons and a couple things you need to be aware of if you’re looking to short sell some of these low priced stocks. So today we’re gonna talk about shorting low-priced stocks, which is a very highly profitable niche.

You got a lot of rules, a lot of things you’ve gotta be careful about, and I talk about those in a lot of the article, but today, I’m gonna talk about some of the limitations, maybe you’ve tried to short a stock and you got the order rejected, you couldn’t figure out why, you saw this great stock, or actually not this great stock, but this terrible stock, that was up huge and you were hoping it was gonna crack down, you go and enter that order, and you get denied.

So, couple things to keep in consideration, we’re gonna start with you have to have a margin account in order to short stocks, and this goes with every broker.

If you have a cash account, which is a great tool, cash accounts I think are often looked down upon in the day trading community, but the nice thing is you’re not under the auspices of the PDT, now you still have a settlement period, so there’s still some hassles, but don’t discount the attributes of a cash account.

But in this situation, one of the biggest drawbacks is if you’re looking to short, you cannot do that on a cash account.

So start by, if you wanna short, start by contacting your broker, say hey, I wanna convert my account from a cash account to a margin account, they’ll send you some paperwork, you’ll fill it out, they’ll then convert your account.

So that’s one of the first things that many people don’t realize, they just don’t realize, they open up an account, they try and hit that short button, order gets denied.

Next thing, and this is probably the biggest pain with short selling, is getting that borrow.

Remember, and I won’t spend too much time on it, ’cause maybe you’re familiar with shorting, we talk about it in other videos, but when you short a stock, you sell the stock before you buy it.

In order to sell something that you do not own, you have to borrow it. You have to obtain those shares from your broker, from your clearing firm, then once you have the right to short those shares, you enter the order, you take that negative position, so if you short a thousand shares of ABC, you’ll have a negative 1,000 shares in your account.

That’s the thing you want to kind of have that understanding, you can’t have a negative of anything unless you’re borrowing them. So now what happens, especially in these low-priced and volatile stocks, is your broker simply may not have a borrow.

Especially in low-float land, there’s only so many shares out there and if it’s middle of the day or end of the day they may just be borrowed everywhere. And it may not be your broker’s fault.

The simple fact might be there’s only a million shares to borrow, and they’re all gone by middle or end of the day. The other situation that happens is, and this is no quote unquote put-down, but many brokers simply do not want you to short these stocks.

So they won’t even try and obtain a borrow on a $1 stock, or a 50 cent stock or a $2 stock. And the reason they do this is, the simple fact is it’s a risky strategy and if you’ve got a small account and you’re a new trader, they kind of, a lot of brokers look at this as basically giving you a loaded gun and they don’t wanna do that.

Now you can obviously lose money buying stocks, but going short, there is a huge potential for massive losses, I mean you hear about account blowups, you know, many traders on their journey, they blow up accounts once, twice, multiple times, most of the time that happens from going short and getting the wrong stock short and taking that, ’cause remember, if you’re short, stock can go up a hundred, 200, 300 percent.

If you’re a long, the stock can only go to zero. You can only lose a hundred percent, you can’t lose 200, 300, 400 percent going long. You can short.

So that’s the other thing is that borrow idea. So be sure, contact your broker and if you’re looking to change brokerage accounts, look at some of these volatile stocks, message your broker and say hey, would I have been able to borrow this stock, and if the answer is no, you may want to start Googling around and looking for a different broker, because the borrows vary depending on the broker.

So keep in mind in summary, these are just kinda two quick tips I wanted to go over. Be sure to check out our other article, I want everyone to succeed.

I want every trader to be successful, this is something that I’m very passionate about, I want every one of you to succeed, but make sure you fully understand how to short, how to approach it, how to stick to your risk management, then when you’re ready to take that next step, be sure you’ve got a margin account, and be sure your current broker has those borrows on those stocks, because hey, I’ve been there many times, it’s very frustrating to be licking your chops and be like this is the best setup I’ve ever seen and then you hit that short button and it says no shares.

So take these two tips into consideration and let me know below, drop me a comment, have you shorted a stock? How have you done? And then also have you been quote unquote twisted up in a short?

I’ve been there a lot of times, and I’m curious, have you ever been staring down that big loss and begging for the stock to come back down?

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