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How To Short A Stock

April 17, 2025

How To Short A Stock. Hero Image for Blog Article. Article by Shane Neagle.

Introduction

Shorting a stock is a strategy based on speculation, selling at an assumed high, and buying the stock back at a lower point in the future. Traders who are looking to short a stock can turn to brokerages such as TradeZero’s award-winning platform for access to specialized tools with unique metrics related to short selling, and commission-free trading. Here, we’ll explain how the entire process of shorting a stock works.

What Is Short Selling?

Short-selling typically requires the trader to have a margin account with a minimum balance and the opportunity to borrow a stock. Short-selling is used when a trader expects a stock to decline.

The short seller aims to profit by borrowing stock from the brokerage (importantly, this means the trader doesn’t “own” it), selling the borrowed stock, which then must be monitored as the trader hopes for a price drop. If the price does drop as planned, the trader buys it back, and returns it to the brokerage for a profit. This profit represents the difference between the amount the trader initially purchased it for (or ‘borrowed’ it), and the amount at which the trader then bought it back from the market.

For instance, if a trader short-sells 10 shares of a company at $100 each and buys them back at $80, the $200 difference is the profit.

Before shorting a stock, the trader must check its availability using the tools on the broker’s platform. Hard-to-borrow stocks might be subject to availability, while easy-to-borrow stocks are always available.

Short-selling is highly dependent on market timing and trader sentiment. Waiting too long or having too much optimism surrounding a short stock can lead to unwanted risks.

In theory, an investor is allowed to hold a short position indefinitely if the investor has enough money to cover potential losses—and if the brokerage allows it in the first place. However, due to the high demand for hard-to-borrow stocks, a broker’s margin calls, and short squeeze risk, a trader might be forced to close the position earlier.

How Short Selling Works: Step-By-Step Guide

  1. Opening a margin account - Margin accounts require traders to have a minimum balance to cover potential losses and allow the trader to borrow shares.
  2. Traders speculate which stocks to short-sell - Traders research the stock they believe will decrease in value.
  3. Locating borrowable shares - The trader will need to use tools to locate shares.
  4. Checking short interest and short interest rates - These are used to assess risk levels.
  5. Placing the order - Place the order after confirming fees and share availability.
  6. Monitoring - Traders must actively monitor price changes.
  7. Potentially setting stop-loss orders after entry.
  8. Closing the short position - Ideally, the price has decreased, and the trader will be earning a profit from the price difference by closing the position.
  9. Analysis of the trade - Experienced traders should analyze the trade once it is closed, whatever the outcome.

Tools And Features On TradeZero That Support Short Selling

TradeZero offers multiple tools designed to help traders locate and short stocks efficiently. The Single Use Locate feature allows traders to find shortable stocks at a lower cost than Pre-Borrows. If unused, the locate is credited back.

Commission-Free Stock Trading: A commission-free model has become quite popular among brokers today. TradeZero offers commission-free short selling with qualifying criteria (learn more about TradeZero’s pricing and fees here).

Access To Hard-To-Borrow Locates

TradeZero offers 3 different ways to locate hard-to-borrow (HTB) stocks, each there to serve as a “permission slip” to borrow a stock, but each designed to serve a different purpose:

  • Locates (L) - for non-threshold securities that the trader would short and cover multiple times
  • Single Use Locates (SU) - for threshold securities the trader wants to short once
  • Pre-Borrows (PB) - to minimize the risk of a buy-in

Short List Availability

This is specifically designed to make short-selling easier. Traders will be provided with a curated list of stocks available for shorting, which will enable them to make their decisions much faster.

Risks Of Short Selling (And How To Manage Them)

  1. Unlimited Loss Potential - If the stock price rises instead of falls, traders can face significant losses. Use stop-loss orders to prevent losses.
  2. Margin Requirements - If the market moves against the position, the broker can issue a margin call, making the trader deposit additional funds. Keep additional funds in the account.
  3. Short Squeezes - If too many traders are shorting the same stock, the price can rise rapidly, forcing the trader to cut his losses and abandon his position. Avoid high-interest shorted stocks.
  4. Regulatory Halts - Regulatory bodies may impose trading halts due to excessive volatility or potential manipulation. Monitor volatility indicators.
  5. Broker Buy-Ins - If a shorted stock is in high demand or unavailable, the broker can forcefully order a buy-in for the market price. Use Pre-Borrow or Single Use Locates to reduce the risks.
  6. Positive, or non-affecting negative, news - Positive news surrounding the company can lead to short squeezes, while non-affecting negative news can leave the short stock unaffected. By being informed, you can avert the negative effects of news.
  7. Herd behavior - Once short sellers begin covering their shorts, other traders will join. Traders need to be informed and cool-headed while using objective facts to make decisions.

When Is Short Selling A Good Strategy?

Short-selling is an effective strategy when a stock is expected to lose its value, whether it is because of over evaluation, weak earnings reports, bearish markets, or market corrections.

While short selling always comes with risks and should only be utilized by seasoned traders who understand risk management, some indications that a stock may decrease in value could include:

  • Overvalued stocks - Overvalued stocks are those assessed higher than their fair value.
  • Weak earnings reports - Company setbacks like layoffs, slowing revenue, and missing targets.
  • Market corrections - Cascading selling, volatility, and downside momentum signal a good time to short-sell.
  • Bearish market - In a bearish market, mass selling lowers stock value due to negative speculation.
  • Sector-specific downtrends - New laws or trade agreements can largely impact entire sectors.
  • Hype stocks - Stocks with weak fundamentals are only as strong as a current trend. Once the social elements fade, so may the value of the stock.

Conclusion

Traders that engage in short selling must be aware of the implied risks, use the proper short-selling tools, have good market knowledge, and monitor several key indicators to understand the timing for short-selling.

Disclaimer:

TradeZero America, Inc., a United States broker dealer, registered with the Securities and Exchange Commission (SEC) and member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC); TradeZero, Inc., a Bahamian broker dealer, registered with the Securities Commission of the Bahamas; and TradeZero Canada Securities ULC, a Canadian broker dealer, member firm of the Canadian Investment Regulatory Organization (CIRO) and member of the Canadian Investor Protection Fund (CIPF) (collectively the “TradeZero Broker Dealers”) are subsidiaries of TradeZero Holding Corp. TradeZero Broker Dealers offer self-directed electronic securities trading to their customers. TradeZero Broker Dealers do not provide financial or trading advice and do not make investment recommendations to their customers. This communication does not constitute an offer to sell or a solicitation to buy any security or instrument which it may reference. There is a risk of loss in online trading of securities including equities and options. Trading on margin is for experienced investors only as the amount you may lose can be greater than your initial investment. Likewise, short selling as a securities trading strategy is extremely risky and can lead to potentially unlimited losses. If you have any specific questions about TradeZero’s brokerage services, please reach out to the TradeZero Broker Dealer in your jurisdiction.

Tokenist Media LLC is a paid marketing partner of TradeZero that receives compensation from TradeZero for broadcasting, displaying, and/or presenting marketing and sponsorship materials that promote TradeZero and the TradeZero Broker Dealers. TokenistMediaLLC is a paid marketing partner of TradeZero that receives compensation from TradeZero for broadcasting, displaying, and/or presenting marketing and sponsorship materials that promote TradeZero and the TradeZero Broker Dealers.