Short Selling Stocks: 10 Things You Need to Know on How to Short Sell a Stock

If you are interested in learning more about short selling stocks, here are some helpful tips to help you get started in the research process so you can learn everything you need to know about how to short sell stocks.

If you are unsure of what it means to short sell a stock, be sure to also read our related article: “What is Short Selling?”

Here are 10 Things You Need to Know About Short Selling Stocks:

1. Understand the Risk: First and foremost most experienced traders will tell you not to short sell at all because it is extremely risky.  That is why it is hard to find brokers who are even willing to allow you to short sell unless you have an extra $25,000 laying around that you are not afraid to lose.

2. Be Prepared! If you still think you want to learn how to short stocks even after all the warnings you will uncover in your research, make sure that you are prepared. Short selling is only for informed experienced traders so learn as much as possible before you attempt it. You will want to research as much as you can about the company and be cautious in your forecasting as being wrong can severely cost you.

3. Practice With Paper Trading First: At the minimum practice by making paper trades (simulated trades) or invest as little as possible before you even think of risking larger amounts of money. Any money you risk in the stock market is money you must be willing to part with and I do mean all of it.

4.  Never rely on anyone else to influence your decision on whether or not to short a stock. Do your own due diligence by conducting your own research and analysis. Pay attention and research the companies with the most hype about a stock – they could be a potential short candidate.

5. Get a good online broker. This is important because you need a broker who allows you to short stocks and who actually has shares available to short.  Here are a few of the online brokers who allow short selling stocks:

• Suretrader – Suretrader is a low cost option and they make short selling as easy as clicking a button. They also have shares available for shorting.
• Interactive Brokers – They have great pricing per trade but require you to have a much larger cash balance than Suretrader to get started.
• SpeedTrader- Their cost per trade is low but they require a huge cash balance to short sell.
• TD Ameritrade – They are a large firm that many traders prefer and use but they are also one of the most expensive brokers in every way.

6. Get practice in learning how to short sell in the stock market by making long trades.  (Long trades are the opposite of short selling) – As you evaluate each trade speculate what could have happened had you shorted the stock.

7. Look for Companies That Are Doing Poorly: In general, the worse the company, stock, and management is the better your chances are in short selling.  Remember everything works in reverse in short selling.

8. Watch the action: Look for stocks that have an unexplained crazy spike in price action for no good reason that you anticipate will come crumbling back down.

9. Consider an ETF Instead: Keep in mind there are ETF’s that bet against certain commodities such as gold (check out the ticker “DUST” ) or oil (check out “DRIP”).  You can actually take a long position on these stocks even though they are betting on the prices going down.  Thus, you are short selling without actually short selling.  Please be aware that the two ETF’s I just mentioned have multipliers which means they take the actual price results of a sector such as gold or oil and multiply the results by 3 so you can gain or lose more than things may appear on the surface.  As always be careful and do your own research. {Learn more about ETF’s here}

10. Research, Research, and More Research: You will want to research and find long term trends across entire sectors such as energy or commodities that have been consistently dropping.  For example, if nearly every solar industry stock has been losing money day after day for months you might want to consider shorting an individual solar stock that you feel is in real trouble for other reasons such as terrible sales, lawsuits or other terrible news the company is suddenly facing.

Short selling stocks can be a huge risk, but it can also pay off for the experienced trader. Hopefully these 10 tips for how to short sell a stock will give you an idea on what you need to learn about and practice doing to determine whether this is a trading strategy that could be right for you.

Do you have any tips you’d like to share for someone who is a beginner just learning about short selling stocks? Share your tips below!