Best Stockbroker Platforms for Shorting

Best Stockbroker Platforms for Shorting

Best Stockbroker Platforms for Shorting

What Is Short Selling?

Short selling is a gamble that the price of a certain stock will fall, and you take advantage of this by borrowing a stock from a third party or a broker. You then sell it at a higher price, buy it back when the price drops and return it to the broker.

There can be huge profits available to traders who short sell, but it can be very risky, as the prices could rise.

Traditional stock trading comes with the adage of ‘buy low, sell high’ – and this is usually for a long position where you are waiting for a stock price to rise to make a profit.

Short selling is the opposite of this; a short-term trading strategy that hinges on a stock price falling – so it could be described as ‘sell high, buy low’ instead.

The process can make quick profits, if the market entry and exit is made at the right time.

To begin with, you need to find a place to borrow stocks to sell at a high price – and you can usually do this through your broker. Then, you open a sell position and sell the borrowed stocks.

When the market drops, you will then buy the stocks back at a lower price. The difference between the price you originally sold it for and the price you then bought it for is the profit you will make, and then you return the borrowed stocks to wherever you bought them from.

The huge amount of risk here comes from the volatility of the market – prices could climb instead of fall, and there is no ceiling to the price a stock can achieve.

You will need to buy back the stocks at whatever price they make in order to return them to where you borrowed them from. This is why short selling is considered an advanced strategy that should only be used by experienced traders.

It is worth considering that in order to short sell stocks, you will need to have a margin trading account with your broker, and there are some specific criteria you will need to meet with most brokers.

These criteria include a certain balance and a maintenance margin (a minimum amount that is held in your account), among other things.

The short stocks that can be borrowed and returned at the end of the trade are usually located by the broker, which means that you might need a specialist broker that is used to dealing with short selling and finding hard-to-buy stocks.

Short selling can be a speculative strategy as you’re gambling on a stock declining quickly – but some investors and portfolio managers use a version of short selling called hedging.

Hedging is considered a respectable and lower-risk protection of profits, while short selling has a negative reputation of being used by ruthless profit hunters who want to see a business destroyed on the stock market.

While it might be considered to be unethical to effectively bet against the market, short selling can help the market be more efficient by providing more liquidity.

Why Choose a Specific Broker for Short Selling?

Most brokers will offer a margin account, although there might be some limitations on use for individual accounts, such as a minimum deposit and a maintenance margin amount.

Choosing a broker that is set up to support short selling will make finding the right stocks to short much simpler and completing the trades easier too.

To make the right decision on the broker you want to use, think about the following:

  • Large stock inventory – Some brokers have custody of a number of stocks, and this makes it simple to borrow from your broker. This is especially useful if you have chosen a less popular stock to short – it is cheaper and more straightforward to borrow from your broker than it is to find the stocks and borrow them from a third party.

  • Access to a stock loaner – For harder to find stocks, and those that are not in the custody of your broker, a stock loaner is a specialized service that can be used to create a short locate and find the stocks you want to borrow. There is often an extra fee for this service.

  • Margin accounts – While most brokers offer a margin account to individual traders, the criteria for margin accounts can differ from broker to broker. Look out for the minimum deposit amount and keep in mind the maintenance margin – if your account drops below this, you might be subject to a margin call which forces you to liquidate your assets to cover the shortfall.

  • Rates – Both long selling and short selling will have specific costs, like commission, cost per share, locate fees, account fees and trading fees. A broker that specializes in short selling will be able to give a transparent overview of these costs.

CFDs vs Spread Betting

CFDs and spread betting are quite similar, and on a macro level it might be difficult to understand the differences.

CFDs are contracts for difference.

They are a contract between the buyer and seller, where no stock changes hands – instead, the contract stipulates that the buyer must pay the seller the difference in value between what it is valued at now, and the value at the end of the contract.

Spread betting is like a CFD in as much as you will not own the asset, but you are betting on a price movement, which is a cost effective way to speculate whether the market is bearish or bullish.

Spread betting has a defined expiration date. Money is made through an initial bet on the change in points, multiplied by a specific dollar amount.

CFDs and spread betting can be used on a variety of trading instruments and are all about speculation.

Spread betting tends to have different taxation rules on profits – in many cases, they are considered winnings from gambling rather than capital.

CFD profits are taxable as gains, and this is one of the reasons why it might be more cost effective to choose spread betting.

The fees and charges relating to CFDs can be higher, including paying a commission and paying the spread, as well as financing if the position is held overnight (as it is considered an investment at that point). Spread betting is cost effective because it is commission free.

CFDs are not available in the US, where spread betting (sometimes known as spread trading) is largely permitted – so availability might be a consideration.

Hard vs Easy-to-Borrow Stocks

Stocks that can be used for short selling are listed every day, separated by their availability.

Every morning, the brokers that have custody of stocks will list a stock as either easy to borrow (ETB) or hard to borrow (HTB).

If you have a prediction about a stock that you think is going to decrease, then you want to be able to borrow it so you can take advantage of the movement, so availability of the stock to be borrowed is essential.

This availability is defined by a number of factors, including:

  • Liquidity
  • Volatility
  • How many stocks have been borrowed already
  • Percentage of float

These factors are always moving and dynamic, which is why they change every day.

The ETB list is usually populated by the most widely traded stocks – those at the top of the NYSE, for example.

In general terms, mainstream brokers might not offer HTB stocks for short selling, and it is more likely that a Direct Market Access (DMA) broker will have better access to HTB stocks because they work with independent clearing firms.

Short Locates

If you are looking for a HTB stock, you will need a broker that can perform effective and efficient short locates – but it is worth noting that there is a separate fee for this that will be added to the overall costs and will reduce your profits.

In many cases, the short locate fee will still have to be paid even if you decide not to move forward with the trade.

If you are looking to borrow some stock that is on your broker’s HTB list, then you will have to arrange a ‘short locate’ to be able to find the stock to borrow.

Some brokers have a short locate function built into their platform, and they will locate the stocks you are looking for through their network.

Understanding how your chosen broker deals with short locates will help you to become more flexible in your short trading – and the specific terms that will come with this service.

Borrowing Fees

Borrowing fees are an extra cost that needs to be factored into the decision on using short selling as a trading strategy.

In most cases, the borrowing fees are much higher on HTB stocks, thanks to the short locate fees.

You can check in advance to see what the borrowing fees would be for your preferred stock with your broker, but it is unlikely that you will get a dollar amount, as there are so many variables – you will likely have to perform your own calculations.

Knowing the fees and commissions that apply to your short selling strategy will ensure that you keep an eye on the profits that you are making.

Recommendations

1. eToro

Best for: Short Selling CFDs
Pros: Simple to short sell a CFD through the app
Cons: No option for short selling other instruments

eToro is a simple-to-use broker that is accessible for beginner traders, while offering all the functionality that an experienced trader needs, and with the mobile app trades can be made wherever you are.

Visit eToro

2. Interactive Brokers

Best for: Experienced traders
Pros: Huge range of stocks to choose from
Cons: No access to HTB stocks

Interactive Brokers was founded more than 40 years ago, and today it supports over 2.17 million trades that take place every day. With lots of education available, this can be a great place for beginner or intermediate traders to learn the ropes, but for the advanced traders there are a huge range of assets available for long and short selling.

Visit Interactive Brokers

3. TradeZero

Best for: Finding HTB stocks
Pros: Zero commission and zero fees if 100,000 shares traded per month
Cons: Not top-tier regulated

TradeZero is known for providing a great brokerage service with minimal costs and fees.

Founded in 2014 in the Bahamas, this broker has the lowest margin account requirements ($1,000) and the $9 monthly account fee for the ZeroPro account is waived if you meet the trading volume stipulation.

Visit TradeZero

4. Lightspeed

Best for: Fast execution of trades
Pros: More than 6,000 ETB stocks available
Cons: High fees for non-active traders

Lightspeed is a competitively priced broker with a brilliant proprietary trading platform.

The main selling point – and the reason for the name – is the low latency when making a trade.

Thousands of ETB stocks are available daily, perfect for a trader who wants to adopt a good short selling strategy.

Visit Lightspeed

5. Cobra Trading

Best for: Access to HTB stocks
Pros: Direct access routing provides the best shorting opportunities on the market
Cons: Minimum account balance is $25,000

With the whole brokerage dedicated to supporting experienced traders, Cobra Trading has exceptional access to borrows, alongside personalized customer service and affordable fees and commissions.

Visit Cobra Trading

6. Webull

Best for: Intermediate traders looking to start short selling
Pros: Offers pre-market and aftermarket hours trading
Cons: No mutual bonds or OTC stocks available

Webull is a mobile app-based broker that offers commission-free stock and EFT trading. With lots of education available and guidance from professional traders at the end of the phone, Webull is the best place for the intermediate trader.

Visit Webull

7. TD Ameritrade

Best for: Combining short selling with other strategies
Pros: Flat fees charged rather than a number of different fees added together
Cons: Short selling is very expensive on this platform

For more than 40 years, TD Ameritrade has offered thousands of trading instruments, making it easy for the savvy trader to combine short selling with other strategies and create a diverse portfolio.

Visit TD Ameritrade

8. Charles Schwab

Best for: Diversification of portfolios
Pros: Can find HTB stocks through third parties if not in custody
Cons: Have to pay a minimum 50% of the stock's value in order to be able to sell it short

One of the most famous brokers on this list, Charles Schwab has lots of trading instruments available so you can short sell and long sell in order to grow your profits – and you can combine your shorting strategy with other ideas in the wide portfolio.

Visit Charles Schwab

Final Thoughts

Short selling is not for the faint-hearted, and, in many cases, the intuition that experienced traders use to decide which stocks should be shorted comes with years of experience.

However, this high-risk strategy can provide some unbelievable returns – so if you feel confident enough about getting started and you have a ‘gut feeling’ about a stock that is about to plummet, you can try your hand at short selling with the right broker on your side.


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