How To Borrow Stock Short

How to Borrow Stock to Short?

First, let’s dive into what short-selling stocks entail. If an investor is looking for a safe and stable return on his money, he’d likely buy a bond or other fixed interest-bearing financial instrument with low risk.

However, if investors want to risk potential growth, they would look to invest in the stock market.

Stocks are not without risk, though it’s important to note that if you own a stock, you own a piece of a company and at least some portion of its financial assets and liabilities.

As such, the value of your ownership stake is contingent upon the success and profitability of its company.

For example, if there is a sharp decline in business activity or too many people bringing sales forward from the future into today for tax purposes, demand for shares will decline, and so will their prices.

So while shorting stocks does have its drawbacks, investors still look at it as an opportunity for wealth creation.

So how do you go about shorting stocks? Well, the following are the different ways to do it.

1. Using a Margin Account

The most straightforward way to short stock is with a margin account. A margin account allows you to borrow money from your broker and use that money as collateral for your stock.

The interest rates on a margin account vary by broker, but they’re typically at least three times the going interest rate for a typical savings account.

In addition, your broker may charge a fee of around 3% of the total value of the stock you’ve borrowed. You can use a margin account to borrow stocks from your brokerage firm even though an investor holds the stock on paper.

Some brokers require you to have proof from the owner that they’re willing to lend out their shares to help confirm that your short sale is in good standing.

2. Using an Electronic Broker

If you’re willing to go off the beaten path of investing, you can use an electronic broker.

An electronic broker allows you to borrow stocks electronically without having to set up a margin account or talk to anyone at your broker. You can tell the broker how much stock you want, which market (stock market index or individual stock), and how long you want the loan for.

The amount you need to put up as collateral is generally something like 1% of your account balance up to $10,000. Suppose you’re looking to short stocks for longer than six months or so; it may be worthwhile talking with your broker about whether they offer other options for your investment needs.

3. Using a Place to Sell Stocks

Lastly, you can sell your stock directly to a company that would then use the shares to short.

This, however, is nothing more than illegal insider trading and could get you into trouble with the SEC.

For instance, if you just sold your Apple stock because you don’t like it anymore or if you suspect an Apple product will fail this way, it’s legal for the person who shorted the stock to have it in their possession until they sell it.

There are many options to borrow stock to short. While most of them are perfectly legal, it is best advised that you do not send your broker any confidential information about your company to ensure your privacy.

Did you know?

We make courses that can help you learn how to trade and develop trading skills whether you are just starting out as a beginner or have been trading a long time.

Check out our Course Academy to see how you can learn how to develop into the trader you’ve always wanted to be.

← Back to the blog