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access brokers have a list programmed into the electronic trading platform so that you can quickly short most stocks but you cannot inadvertently short stocks that are not borrowable. |
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2. What happens if the price goes up instead of going down like you had planned? You lose! But this is similar to buying a stock and seeing the price go down instead of up. |
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There is a pretty important difference, however. If you buy a stock and the price goes down, it can only go to zero. That's all you can lose. It may be a lot of money, but it is a finite amount of money. |
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On the other hand, if you sell a stock short and the price rises, there is no limit to how far it can rise. Your loss, theoretically, can be infinite. There is a big difference between finite and infinite! |
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3. How do you actually execute a short sale? Well, first you have a good reason to believe that the price will decline. Then you wait for an uptick. Securities and Exchange Commission rules allow investors to sell short only when a stock price is moving upward to prevent investors from destabilizing the price of a stock when the market price is falling. |
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On your level II screen, you will see the green indicator or an up arrow, depending on the direct access system you are using. That is when you can enter a short order. |
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What this all means is that although you think the stock is going to decline in price, you can only short it when the price is actually rising! |
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Don't worrythis is not as frightening as it sounds. When trading against proven chart patterns, you simply wait for an uptick within your target entry price range and execute the sell. As you gain more experience you will learn to short offer the stock during a downtick at a price at least 1/16 above the inside bid to actually create the uptick yourself. |
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Certain index instrumentssuch as Spiders (SPYwhich mirrors the S&P 500) and Diamonds (DIAwhich mirrors the Dow Jones Index)can be sold short without adherence to the uptick rules. If you find yourself in a rapidly falling market these instruments may be your best way to quickly take advantage of the short selling opportunities. |
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One last thing about short selling: Have you heard the term "short squeeze"? This occurs when a particular stock has experienced considerable short selling. All of those short sellers are going to have to buy |
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