Shorting a stock on E*TRADE means borrowing shares, selling them at today's price, and hoping to buy them back cheaper later

To short a stock on E*TRADE, you place a sell order marked "sell short" instead of a regular sell order. E*TRADE borrows the shares on your behalf from its inventory or other sources, you receive the sale proceeds, and you owe E*TRADE those shares back at some point. If the stock price falls, you buy the shares back at the lower price and pocket the difference. If the price rises, you lose money — potentially unlimited amounts, since a stock can rise indefinitely.

Shorting is not available in all account types. You need a margin account, not a cash account. You also need to meet E*TRADE's minimum requirements: typically $2,000 in account value for margin accounts, though some brokers require more. E*TRADE charges interest on the borrowed shares, calculated daily and deducted from your account. The interest rate varies by stock and market conditions — hard-to-borrow stocks cost more.

Key Takeaways

  • Shorting requires a margin account with at least $2,000 in account value; you cannot short in a cash account.
  • You mark the order "sell short" in E*TRADE's order entry screen, and E*TRADE borrows the shares and lends them to you automatically.
  • E*TRADE charges daily interest on borrowed shares, and the rate depends on the stock and how many shares are available to borrow.
  • You must eventually buy the shares back (called "covering") to close the short position, and you owe E*TRADE any dividends paid while you hold the short.
  • A stock price can rise indefinitely, so your potential loss on a short is theoretically unlimited, unlike a long stock purchase.

Setting up a margin account on E*TRADE

Before you can short, you need to convert your account to a margin account or open a new one as margin from the start. Log into E*TRADE, go to Account Settings, and look for Account Features or Account Type. You will see the option to upgrade to margin. E*TRADE will ask you to agree to a margin agreement, which outlines the terms: interest rates, maintenance requirements, and what happens if your account falls below the minimum.

The margin agreement is a legal document, not a marketing piece. Read the sections on maintenance requirements and forced liquidation. If your account equity drops below E*TRADE's maintenance requirement (often 25% to 30% of the value of your short position), E*TRADE can force you to buy back shares or deposit cash without asking permission first. This is called a margin call.

How to enter a short sell order in E*TRADE

Open the Trade tab in E*TRADE's platform (web or mobile). Search for the stock you want to short. Click on the stock to open the order entry screen. In the order type section, you will see options like "Buy" and "Sell." Click on "Sell," then look for a dropdown or checkbox that says "Sell Short" or "Short Sale." Select it.

Enter the number of shares you want to short and the order type: market order (executes when ready at the current price), limit order (executes only if the price hits your target), or stop order (executes if the price drops to a certain level). Review the order summary — it should show "Sell Short" clearly. Click Submit or Preview, depending on your settings. The order goes to the market, and once it fills, E*TRADE has borrowed the shares on your behalf.

Not all stocks can be shorted. If you search for a stock and the "Sell Short" option is grayed out or missing, that stock is not available to borrow on E*TRADE at that moment. This happens when all available shares are already borrowed, or the stock is on a restricted list (often small-cap or newly listed stocks). You can try again later, or choose a different stock.

Understanding margin requirements and interest costs

When you short a stock, E*TRADE requires you to maintain a certain amount of equity in your account relative to the short position. This is the maintenance requirement, and it is usually 25% to 30% of the market value of the shorted shares. If you short $10,000 worth of stock, you need to keep at least $2,500 to $3,000 in account equity. If the stock price rises and your equity falls below that threshold, you get a margin call.

Interest accrues daily on the borrowed shares. E*TRADE calculates it as an annual percentage rate (APR) and charges it to your account each day. The rate depends on the stock: popular, straightforward-to-borrow stocks might cost 0.5% to 2% per year, while hard-to-borrow stocks can cost 10%, 20%, or more. You can see the current borrow rate for a specific stock in E*TRADE's platform before you short it — look for "Short Borrow Rate" or similar language in the stock details.

You also owe E*TRADE any dividends paid on the shorted shares while you hold the position. If you short 100 shares of a stock that pays a $1 dividend, you owe E*TRADE $100. This is deducted from your account automatically on the dividend payment date.

Covering your short position and closing the trade

To close a short position, you buy back the shares you borrowed. This is called covering. Go to the Trade tab, search for the stock, and place a regular buy order (not a short order). When the buy order fills, E*TRADE returns the borrowed shares and credits your account with the proceeds from the original short sale minus the buyback cost, minus interest and any dividends owed.

You can cover at any time — there is no important date, though interest keeps accruing every day you hold the position. Some traders cover within hours or days; others hold for weeks or months. The longer you hold, the more interest you pay, so factor that into your decision about when to exit.

If you want to set an automatic exit point, use a stop order or limit order when you cover. For example, you could set a buy limit order at $45 if you shorted at $50 — the order executes automatically if the price drops to $45, locking in your profit without you having to monitor it constantly.

Restrictions and risks specific to short selling

The SEC's uptick rule requires that a short sale can only occur at a price higher than the last different price (called a tick). In practice, this means you cannot short on a downtick — you must wait for an uptick. E*TRADE's platform enforces this automatically; if you try to short on a downtick, the order will be rejected.

Some stocks are on the SEC's threshold list, which means they have failed to settle (the seller did not deliver the shares on time). These stocks have additional restrictions on shorting. E*TRADE will tell you if a stock is restricted when you try to short it.

Your potential loss on a short is theoretically unlimited. If you short at $50 and the stock rises to $100, $200, or $500, you lose money on every dollar of increase. A long stock purchase (buying shares) limits your loss to what you paid; a short has no such limit. This is why shorting is considered high-risk and is not suitable for all investors.

Frequently Asked Questions

What is the minimum account balance to short on E*TRADE?

E*TRADE requires a margin account with at least $2,000 in account value to short. Some stocks or market conditions may require more. Check your account settings or contact E*TRADE to confirm the current minimum for your account type.

Can I short a stock in a cash account?

No. Shorting is only available in margin accounts. If you have a cash account, you must upgrade to margin first. The upgrade process takes a few minutes in Account Settings, and E*TRADE will ask you to agree to the margin agreement.

What happens if E*TRADE recalls the shares I borrowed?

E*TRADE can recall borrowed shares, though this is rare. If it happens, you receive a notice and a important date (usually several days) to cover the position by buying back the shares. If you do not cover by the important date, E*TRADE will force a buyback at the market price at that time, which could result in a loss.

Do I owe taxes on short sale profits?

Yes. Profits from short sales are taxable as capital gains. If you hold the short for less than one year, it is a short-term capital gain (taxed as ordinary income). If you hold it for more than one year, it is a long-term capital gain (taxed at a lower rate). Keep records of your short sale dates and prices for tax reporting.

Can I short penny stocks or very small companies on E*TRADE?

Most penny stocks and very small companies cannot be shorted on E*TRADE because they are not available to borrow or are on restricted lists. The "Sell Short" option will be grayed out if a stock cannot be shorted. Stick to larger, more liquid stocks if you want to short reliably.