Shorting a stock means borrowing shares to sell them, betting the price will fall

When you short a stock on E*TRADE, you're borrowing shares from E*TRADE's inventory, selling them at today's price, and hoping to buy them back later at a lower price. The difference between what you sold them for and what you paid to buy them back is your profit or loss. It's the opposite of a normal buy-and-hold trade.

E*TRADE lets you short stocks through a regular brokerage account, but you need a margin account — not a cash account. A margin account lets you borrow money and securities from E*TRADE to make trades. You'll also need to meet E*TRADE's minimum balance requirement, which is typically $2,000, though some accounts may have higher minimums.

Shorting is riskier than buying stock because your losses can theoretically be unlimited. If you buy a stock at $50 and it goes to zero, you lose $50. If you short a stock at $50 and it goes to $500, you lose $450 per share. E*TRADE will force you to close the position if your account value drops too far — a process called a margin call.

Key Takeaways

  • You must have a margin account with at least $2,000 in it to short stocks on E*TRADE; a regular cash account cannot short.
  • To short a stock, you enter a sell order in E*TRADE's platform, select "short" as the order type, and E*TRADE borrows the shares for you automatically.
  • E*TRADE charges a borrow fee (interest) on the shares you've borrowed, which varies by stock and is deducted from your account regularly.
  • If the stock price rises sharply or your account balance drops below the maintenance requirement, E*TRADE can force you to buy the shares back and close your short position.
  • You must eventually buy the shares back to close the short — you cannot hold a short position indefinitely.

Setting up a margin account on E*TRADE

Before you can short anything, you need to convert your account to a margin account or open a new one as margin from the start. Log into E*TRADE and go to Account Settings or Account Management. Look for the option to upgrade to margin or enable margin trading. E*TRADE will ask you to agree to the margin agreement, which explains the risks and the interest rates you'll pay on borrowed money.

Once your margin account is approved, you'll see your buying power displayed in your account dashboard. This is the total amount you can trade with, including borrowed funds. E*TRADE will also show you your maintenance requirement — the minimum account value you must keep to avoid a margin call. This is usually 25 to 30 percent of the value of your short positions, depending on the stock.

If you already have a cash account and want to short, you must request the upgrade. E*TRADE typically approves margin accounts within one business day if you meet the minimum balance requirement.

How to place a short sale order in E*TRADE

Once your margin account is active, open the E*TRADE platform (web or mobile app) and search for the stock you want to short. Click on it to open the quote page. Then click "Trade" or the order entry button.

In the order entry screen, you'll see a dropdown menu that says "Buy" or "Sell." Click it and select "Sell Short" (or sometimes labeled as "Short Sale"). Enter the number of shares you want to short and choose your order type — market order (sells when ready at the current price) or limit order (sells only if the price reaches a specific level you set). Market orders fill faster but at an unpredictable price. Limit orders let you control the price but may not fill at all.

Review the order details carefully. E*TRADE will show you the estimated proceeds (the money you'll receive from selling the borrowed shares) and any applicable fees. Click "Preview Order" to double-check everything, then click "Submit" or "Send Order." The order will execute during market hours (9:30 a.m. to 4 p.m. Eastern Time on weekdays).

Understanding borrow fees and interest charges

When you short a stock, E*TRADE charges you interest on the borrowed shares. This fee is called the borrow rate or locate fee, and it varies by stock. Stocks that are hard to borrow (because many people want to short them or few shares are available) have higher borrow rates. Stocks that are straightforward to borrow have lower rates, sometimes near zero.

E*TRADE displays the borrow rate when you place the order, usually shown as an annual percentage. If a stock has a 5 percent borrow rate and you short $10,000 worth, you'll pay roughly $500 per year in interest — charged daily or monthly depending on E*TRADE's current practice. This fee is deducted automatically from your account.

You can check your current borrow rates and fees by logging into E*TRADE and viewing your Positions page. It will show each short position, the number of shares, the borrow rate, and the interest owed so far. Some stocks become unavailable to short if E*TRADE runs out of shares to lend, so a stock you shorted yesterday might not be shortable today.

Closing a short position and buying shares back

To close a short position, you must buy back the shares you borrowed. Go to your Positions page in E*TRADE, find the short position you want to close, and click on it. Select "Buy to Cover" or "Close Position." This will open an order entry screen where you can buy the shares back at the current market price or set a limit price.

Enter the number of shares to buy back (usually the same number you shorted) and choose your order type. Review the order and submit it. Once the order fills, your short position is closed. Any profit or loss is calculated automatically: if you sold at $50 and bought back at $40, you made $10 per share (minus borrow fees and commissions). If you sold at $50 and bought back at $60, you lost $10 per share.

You don't have to close a short position on any particular date — you can hold it as long as you want, as long as your account maintains the required margin balance. However, if the stock price rises and your account value drops below the maintenance requirement, E*TRADE will issue a margin call and may force you to buy back shares to bring your account back into compliance.

What happens if you get a margin call

A margin call occurs when your account value falls below the maintenance requirement set by E*TRADE and the Securities and Exchange Commission (SEC). If you're holding a short position and the stock price rises significantly, your losses grow, and your account value shrinks. When it crosses the threshold, E*TRADE will notify you that you have a margin call.

You have a set number of days (usually two to five business days) to deposit cash into your account or close positions to bring your account back above the maintenance level. If you don't act, E*TRADE can force-liquidate your positions — meaning they'll automatically buy back your short shares at whatever price the market is offering. This can lock in large losses and happen without your permission.

To avoid a margin call, monitor your account balance regularly, especially if you're holding short positions in volatile stocks. E*TRADE's platform shows your maintenance requirement and current account value on the dashboard. If you see the gap narrowing, consider closing some positions or depositing more cash.

Restrictions and rules for shorting on E*TRADE

The SEC has rules that limit when and how you can short. The uptick rule (Rule 10a-1) requires that a short sale can only happen at a price higher than the previous trade, or at the same price as the previous trade if that price was higher than the trade before it. This rule prevents traders from driving a stock's price down through aggressive shorting. E*TRADE's platform enforces this automatically — if you try to short at a price that violates the uptick rule, the order will be rejected.

You also cannot short stocks that are trading below $5 per share (called penny stocks), and some stocks may be unavailable to short if E*TRADE has no shares to lend. Additionally, certain stocks are on the SEC's "threshold list," which means they've been heavily shorted and have settlement issues. E*TRADE will tell you if a stock cannot be shorted.

Short positions are also subject to corporate actions like stock splits and dividends. If the company pays a dividend while you're short, you must pay that dividend to the share lender. If there's a stock split, your short position adjusts accordingly.

Frequently Asked Questions

Do I need a special account to short stocks on E*TRADE?

Yes, you need a margin account. A regular cash account cannot short. You can upgrade an existing account or open a new margin account. E*TRADE requires a minimum balance, typically $2,000, to open or maintain a margin account.

What's the difference between a short sale and a regular sale?

A regular sale (or "sell") means you own the shares and you're selling them. A short sale means you're borrowing shares from E*TRADE, selling them, and betting the price will fall so you can buy them back cheaper. Short sales require a margin account; regular sales do not.

Can E*TRADE force me to close my short position?

Yes, if your account falls below the maintenance requirement due to losses, E*TRADE can issue a margin call. If you don't deposit cash or close positions within the allowed time, E*TRADE can force-liquidate your short positions automatically to bring your account back into compliance.

What happens if the stock I shorted gets delisted?

If a stock is delisted from the exchange, E*TRADE will force you to buy back your shares at the last available price or a price determined by the company's bankruptcy proceedings. You'll be notified in advance, but you won't have a choice — the position will be closed for you.

How long can I hold a short position?

You can hold a short position indefinitely, as long as your account maintains the required margin balance and E*TRADE continues to have shares available to lend. However, borrow fees will continue to accrue daily, so the longer you hold, the more you'll pay in interest.