Short selling, or shorting, is a trading strategy where an investor borrows shares of a stock and sells them with the expectation that the price will fall. Short selling is a risky strategy due to the outcome of the shoring not always resulting in a profit.
The way short selling works is simple. If the price falls, the investor can repurchase the shares at a lower price, return them to the lender, and make a profit. The profit is the difference between the price at the point of lending and selling.
However, if the price rises, the investor will need to repurchase the shares at a higher price, resulting in a loss. Although risky, short selling is a popular trading strategy with most online stock trading platforms, such as Robinhood.
Robinhood is a popular commission-free trading app that allows buying and selling stocks, options, and cryptocurrencies. If you’re thinking about short selling on Robinhood but don’t know how, this guide is for you.
We aim to educate our readers and not in any way offer financial advice. So with all that said, let’s start.
Table of Content
Short Selling on Robinhood in 5 Steps
Short selling on Robinhood can be done in a few steps. However, before doing so, you will need to create a Robinhood account. So make sure you get that one over the line first. Now, let’s go over the short selling on Robinhood steps.
Identify a stock worth shorting
Borrow shares to sell
Place a short sell order
Monitor your position
Place stop loss orders
Step 1: Find a Stock to Short
To short a stock on Robinhood, the first step is to find a stock that you believe will lose value. You can use the app’s built-in tools, such as the stock screener, to help you find potential candidates.
These tools provide traders with additional information regarding a particular stock. Use these tools as they can make the difference between making a profit and losing money.
Step 2: Borrow Shares to Sell
Once you have selected a stock to short, you will need to borrow shares to sell. Fortunately, this is done automatically on Robinhood when you place a short sell order.
Remember that you will need to return the shares you borrow at some point, so you must be prepared to act quickly and repurchase the shares if the price rises to avoid huge losses.
Step 3: Place a Short Sell Order
To place a short sell order on Robinhood, go to the stock’s detail page and tap the “Trade” button. Then, select “Sell” and enter the number of shares you wish to short.
Step 4: Monitor Your Position
The most important part of short selling on Robinhood is to monitor your position. You do this to ensure you have full eyes on the price and ensure it is moving in the desired direction.
Remember that if the price rises, you will need to repurchase the shares at a higher price, resulting in a loss.
Step 5: Use Stop-Loss Orders
The great thing about short selling on Robinhood is that the platform offers numerous trading tools, not just monitoring and analytical ones.
One of these tools is the Stop-Loss Order, which is a way to limit your potential losses when short selling on Robinhood. Place a stop-loss order automatically to trigger a buy order when the stock reaches a specific price, which can help minimize your losses if the stock price rises.
Things to Keep in Mind When Short Selling on Robinhood
Short selling on Robinhood or any other stock-trading platform is a risky affair. So even if you’re familiar with how to short-sell a specific stock on the platform, it’s essential to keep these few things in mind before you begin.
Be Aware of the Risks
Short selling is a high-risk strategy and should only be attempted by experienced investors comfortable with the potential for significant losses.
Like any stock trading strategy, education is of utmost importance. Traders should always go into any trading strategy with a sound mind and an outline of all the possible risks. By doing that, traders ensure they’re making clever financial decisions.
Therefore, it is essential to thoroughly understand the stock you are shorting, including its financials and any potential upcoming events that could affect the price.
Be Aware of the Borrowing Cost
When you short a stock on Robinhood, you borrow shares from another user. This means you will be charged interest on the borrowed shares, known as the borrowing cost. This cost can be high and should be factored into your overall trade plan.
Keep an Eye on Your Account Value
When you short a stock on Robinhood, your account value will decrease if the stock price rises and increase if the stock price falls. So keep an eye on your account value and be prepared to adjust your trade plan if your account value drops too low.
Be Mindful of the Margin Requirements
Short selling on Robinhood requires a margin account, meaning you will need a minimum amount of cash or securities to cover the potential losses.
Be sure to understand the margin requirements and keep your account balance above the minimum to avoid a margin call.
Consider Shorting ETFs or Options
Robinhood also allows short selling of ETFs and options. Shorting ETFs or options can be a good way to gain exposure to a specific market or sector without shorting individual stocks.
Much like shorting stocks, shorting ETFs and options is just as risky.
Conclusion
Short selling on Robinhood can be a useful strategy for experienced investors looking to profit from falling stock prices. However, it is essential to understand the risks and go with a plan.
Robinhood is a popular platform for shorting, and the process of shorting on Robinhood is relatively straightforward. But it is always important to consider the risks and do your research before making any trades.
