What shorting a stock means and how E*TRADE handles it

Shorting a stock means borrowing shares from E*TRADE's inventory, selling them at today's price, and betting that the price will fall so you can buy them back cheaper and return them. E*TRADE lends you the shares, you keep the profit if the price drops, and you cover the loss if it rises. The mechanics are built into the E*TRADE platform — you don't call anyone or fill out a separate form to borrow the shares themselves.

E*TRADE requires a margin account to short stocks, not a standard cash account. A margin account lets you borrow money and securities from E*TRADE to trade. You'll need to have opened a margin account when you signed up, or you can convert an existing account to margin through your account settings. E*TRADE also sets a minimum account value — typically $2,000 — before you can place any short sale order.

Not every stock can be shorted on E*TRADE. The company maintains a "hard-to-borrow" list of stocks where shares are scarce or expensive to borrow. Penny stocks, very new IPOs, and stocks with low trading volume often appear on this list. If a stock is on the hard-to-borrow list, E*TRADE may charge you a daily borrowing fee, or the short sale may be unavailable altogether.

Key Takeaways

  • You must have a margin account with at least $2,000 in it to short any stock on E*TRADE.
  • To place a short sale, you enter a sell order in the E*TRADE platform, select "short" as the order type, and choose your price and timing just like a regular sell order.
  • E*TRADE automatically borrows the shares for you if they are available; if they are on the hard-to-borrow list, you may pay a daily fee or the order may not fill.
  • You must close the short position by buying the shares back (called "covering") before you can withdraw the proceeds or close your account.
  • Short sales carry unlimited loss risk because stock prices can rise indefinitely, so most traders use stop-loss orders to limit how much they are willing to lose.

Opening a margin account on E*TRADE

If you have a standard cash account, you'll need to convert it to a margin account before you can short. Log into E*TRADE, go to Account, then Account Settings, and look for the option to upgrade to margin. E*TRADE will ask you to review and sign a margin agreement that explains the terms — including that you'll pay interest on borrowed funds and that E*TRADE can force you to close positions if your account value drops too far.

The margin agreement is a legal document, not a sales pitch. Read the sections on interest rates, maintenance requirements, and forced liquidation. E*TRADE's current margin interest rate varies based on how much you borrow and market conditions, so check the rate table in your account before you open the position. The maintenance requirement — the minimum account value E*TRADE requires you to keep — is typically 25 percent of the value of your short position, though it can be higher for volatile or hard-to-borrow stocks.

Once your margin account is approved, you'll see your buying power increase to reflect the amount you can borrow. This is not information programs — it's a loan from E*TRADE that you must repay with interest. Your account will show your margin balance separately from your cash balance so you can track how much you've borrowed.

Placing a short sale order in E*TRADE

To short a stock, open the order entry screen in E*TRADE and search for the stock symbol. In the order type dropdown, select "Sell Short" instead of "Sell." This tells E*TRADE to borrow the shares and sell them, rather than selling shares you already own. The rest of the order works the same way: you choose your price (market order, limit order, or stop order), your quantity, and your timing (day order or good-till-canceled).

A market order to sell short executes when ready at the best available price. A limit order lets you set a minimum price — the order only fills if the stock reaches that price or higher. Most short sellers use a limit order because they want to sell at a specific price point, not just any price. You can also set a stop order that automatically triggers a buy order if the stock rises to a certain level, which limits your loss.

Once you submit the order, E*TRADE checks whether shares are available to borrow. If they are, the order fills and you see the short position appear in your holdings. If shares are not available or are on the hard-to-borrow list, the order may be rejected or placed on a waiting list. You'll receive a notification either way. If the order is rejected, you can try again later or choose a different stock.

Understanding borrowing costs and margin interest

When you short a stock on E*TRADE, you pay two costs: margin interest on the cash proceeds from the sale, and a borrowing fee if the stock is hard-to-borrow. The margin interest accrues daily and is deducted from your account. E*TRADE calculates it based on the amount of cash you've borrowed and the current margin rate, which you can see in your account settings or on E*TRADE's rates page.

Hard-to-borrow stocks carry an additional daily fee that E*TRADE charges for lending you the shares. This fee is not a fixed percentage — it depends on how scarce the shares are and how many other traders are trying to short the same stock. E*TRADE will show you the borrowing fee before you place the order if the stock is on the hard-to-borrow list. Some stocks have fees of less than 1 percent per year; others can be 10 percent or higher. If the fee is too high, the short sale may not be worth the cost.

Both the margin interest and borrowing fees reduce your profit or increase your loss. If you short a stock at $50 and it falls to $40, you have a $10 per-share gain before costs. But if you held the position for a month and paid $2 per share in interest and borrowing fees, your actual profit is only $8 per share. Track these costs in your account so you know your true break-even point.

Covering your short position

To close a short position, you must buy the shares back at the current market price and return them to E*TRADE. This is called "covering" the short. You place a regular buy order for the same number of shares you shorted. Once the buy order fills, E*TRADE automatically returns the borrowed shares and credits your account with the difference between what you sold them for and what you paid to buy them back.

You can cover at any time while the market is open. Most traders cover when the stock reaches their target price or when losses hit their stop-loss level. You can also set a buy order in advance — for example, a limit order to buy if the stock falls to a certain price, or a stop order to buy if it rises above a certain price. This way you don't have to watch the stock constantly.

You cannot withdraw the proceeds from a short sale or close your E*TRADE account until you've covered the position. E*TRADE will not let you leave a short sale open indefinitely — if your account value drops below the maintenance requirement, E*TRADE will force you to cover by buying shares at the market price, even if you're taking a loss. This is called a margin call, and it can happen quickly in a volatile market.

Risk and stop-loss orders for short sales

The biggest risk in shorting is that stock prices can rise indefinitely, but your loss is capped only by how high the price goes. If you short a stock at $50 and it rises to $100, you've lost $50 per share. If it rises to $500, you've lost $450 per share. There is no upper limit to your loss, which is why shorting is riskier than buying stocks (where your loss is capped at what you paid).

To protect yourself, use a stop-loss order. A stop-loss order automatically buys shares to cover your short if the stock rises to a price you set in advance. For example, if you short at $50, you might set a stop-loss order to buy at $55. If the stock rises to $55, the order triggers automatically and covers your position, limiting your loss to $5 per share plus costs. Without a stop-loss, you could watch a losing position grow much larger before you decide to cover.

Set your stop-loss price before you enter the short sale, not after. Decide in advance how much you're willing to lose on the trade, and calculate the stock price that represents that loss. Then enter the stop-loss order at the same time you place the short sale order. This removes emotion from the decision and ensures you exit if the trade goes against you.

Dividend payments and corporate actions on short positions

When you short a stock, you are responsible for paying any dividends that the company pays while you hold the short position. If the company pays a $1 dividend per share and you're short 100 shares, E*TRADE will deduct $100 from your account. This is because you borrowed the shares from another investor who would have received the dividend, so you must compensate them.

Stock splits and other corporate actions also affect short positions. If the company splits its stock 2-for-1, your short position doubles in size. If the company issues a special dividend, you pay that too. E*TRADE handles these adjustments automatically — you don't have to do anything — but you should be aware that they will affect your account balance and your margin requirement.

Check the company's investor relations page or E*TRADE's corporate actions calendar before you short a stock, especially if a dividend payment or split is coming soon. These events can increase your costs or force you to cover sooner than you planned.

Frequently Asked Questions

Can I short a stock that I already own?

Yes, this is called a short sale against the box. You sell the stock short while holding the same number of shares. This locks in a price but delays the tax consequences. E*TRADE allows this, but you must have a margin account and the shares must be available to borrow. Check with a tax professional about the tax treatment in your situation.

What happens if E*TRADE recalls the borrowed shares?

E*TRADE can recall borrowed shares at any time, though it's rare. If this happens, you'll receive a notice and a important date to cover the position. You must buy the shares back and return them by the important date. If you don't, E*TRADE will force you to cover at the market price. This is another reason to monitor your short positions regularly.

Do I have to pay taxes on short sale profits when ready?

No, but the IRS treats short-term gains (positions held less than one year) as ordinary income, which is taxed at your regular income tax rate. Long-term gains (positions held more than one year) are taxed at the lower capital gains rate. However, most short sales are closed within days or weeks, so most short sale profits are taxed as short-term gains. Consult a tax professional about your specific situation.

What's the difference between a short sale and a put option?

A short sale borrows and sells the actual stock; a put option gives you the right to sell the stock at a set price without borrowing it. Puts have a defined cost (the premium) and a defined maximum loss (the premium paid). Shorts have unlimited loss potential but no upfront cost. Puts expire; shorts can stay open indefinitely. Both are ways to profit from falling prices, but they work very differently.

Can I short a stock in an IRA or retirement account?

No. IRAs and other retirement accounts do not allow short sales. You can only short in a regular taxable brokerage account with margin enabled. Some retirement accounts allow put options, but not short sales of the underlying stock.