Most traders are familiar with buying, or what we call in trading terms: “longing” a stock. There is also another side of trading that a trader may wish to explore. It is called short selling when a trader locates or borrows a security and sells it on the open market, planning to buy it back later for less money. Short selling broker, TradeZero, operates using a locate window across its trading platforms to provide instant access to many popular locates.

What is Short-Selling?
Short selling is a trading strategy where a trader can profit on the decline in a stock or other security’s price. A trader first borrows or locates shares at a short selling broker to go short a stock, once a short position has been initiated using the short selling broker, a trader has to buy them back at a lower price to close the position. If the trader has successfully bought the shares back at a lower price than entry the trade should result in a profit. It is doing the exact opposite as if a trader were to go long a stock. However short selling is a strategy that needs to be understood firmly as there are certain risks involved using a short selling broker. One of them is the unlimited loss potential a trader could face if no proper risk management has been applied.

The pros of short selling

  • Possibility of high gains even in a declining market.

  • Use of margin: when margin is used only a portion of the trader’s capital has to be put upfront to execute the short trade which leaves more room to possibly open other positions.

The cons of short selling

  • Potential of unlimited losses: as a result of unlimited upside of a stock.

  • Locate cost: with trading to the long side, a trader is not subject to locating shares when entering a position, when shorting a stock this is applicable. A trader has to locate shares, often from a short selling broker to be able to go short a stock.

Short-selling can be a very profitable trading style when used the right way with proper risk management, but as with every trading style, there are both upsides and downsides. Especially nowadays, a short-selling broker allows traders to profit from declining markets, it is more accessible to traders than it was in the past.

Risk management is of the essence when applying this trading style which potentially could make it more of an advanced trading style. This does not mean that beginners should not start with short selling at all, stocks that go up a lot in a very short period can and do often come down which allows a trader to attempt to trade short for profit. Even If a trader is not looking to short sell, understanding the mindset of people who are short selling can be very useful when timing exits on long positions. When looking to short sell a trader should consider a short selling broker to ensure they can locate the stocks they wish to short as consistently as possible.

Disclaimer
This content (“Content”) is produced by Bram Pierik. The Content represents only the views and opinions of Mr. Pierik. Mr. Pierik’s trading experiences and accomplishments are unique, and your trading results may vary substantially. TradeZero does not endorse the Content and makes no representations or warranties with respect to the accuracy of the Content or information available through any linked third party sites. The Content has been made available for informational and educational purposes only and should not be considered trading or investment advice or a recommendation as to any security. Trading securities can involve high risk and potential loss of funds. Mr. Pierik is compensated by TradeZero for producing the Content and may also receive compensation for customers he introduces to TradeZero.

TradeZero provides self-directed brokerage accounts to customers through its operating affiliates: TradeZero America, Inc., a registered broker-dealer and a member of FINRA and SIPC; TradeZero Inc., a dealer registered with the Securities Commission of the Bahamas; and TradeZero Canada Securities ULC, an IIROC member firm and member of CIPF.

References
Investopedia. (2022, September) Liquidation level: What is the liquidation level: https://www.investopedia.com/terms/l/liquidationlevel.asp

Investopedia. (2022, September). Short Selling: What Is Shorting Stocks with Pros, Cons, and Examples. Retrieved from Investopedia: https://www.investopedia.com/terms/s/shortselling.asp

Masterclass. (2022, September). Short Selling Explained: How Short Selling Works. Retrieved from Masterclass: https://www.masterclass.com/articles/short-selling-explained

TradeZero. (September 2022). MARGIN DISCLOSURE STATEMENT. Retrieved from MARGIN DISCLOSURE STATEMENT: https://us.tradezero.co/manuals/Apex-Margin-Disclosure_05082020_Final.pdf