What is short selling?

Short selling is a trading strategy that allows investors to profit from a decline in a stock’s price.

When you short a stock, you borrow shares from your broker and sell them on the open market, expecting to buy them back later at a lower price.

  • If the stock’s price falls, you can repurchase the shares at a cheaper price, return them to the lender, and keep the difference as profit.
  • If the stock’s price rises, you may have to buy the shares back at a higher price, resulting in a loss.

How does short selling work?

  1. Borrowing shares: Your broker locates and loans shares to you from available inventory.
  2. Selling borrowed shares: The borrowed shares are sold at the current market price.
  3. Buying back (covering) shares: You later repurchase the same number of shares to close your position.
  4. Returning shares: The repurchased shares are returned to the lender, completing the transaction.

Requirements for short selling

  • Margin account: Short selling can only be done through a margin account, as it involves borrowing securities.
  • Minimum equity: FINRA requires a minimum of $2,000 in account equity to open a margin account.
  • Maintenance margin: You must maintain a minimum equity balance as required by FINRA and your broker to keep your short positions open.