What shorting a stock means and how Fidelity handles it

Shorting a stock on Fidelity means borrowing shares you don't own, 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. Fidelity doesn't let you short stocks in a regular cash account — you need a margin account, which allows you to borrow money and securities from Fidelity to trade with.

When you short on Fidelity, the brokerage lends you the shares from its own inventory or from other customers' accounts. You're responsible for paying any dividends that get paid while you hold the short position, and Fidelity charges you interest on the borrowed shares. The interest rate varies depending on how hard the stock is to borrow and how many shares are available.

Shorting is riskier than buying stock because your potential loss is unlimited — if a stock rises to $500 a share and you shorted it at $50, you lose $450 per share. Fidelity requires you to maintain a minimum account balance and will force-close your position if your account value drops too far, a process called a margin call.

Key Takeaways

  • You must open a margin account with Fidelity to short stocks; a regular cash account does not allow borrowing.
  • Fidelity lends you the shares to sell short and charges you interest based on the stock's borrow rate and your account size.
  • You pay any dividends declared on the shorted stock while your position is open.
  • A margin call forces your position closed if your account balance falls below Fidelity's maintenance requirement, which is typically 25 percent of the position value.
  • You close a short position by buying back the shares you borrowed, which is called "covering" the short.

Opening a margin account at Fidelity

To short stocks, you first need to convert your account to a margin account or open a new one as a margin account from the start. Log into your Fidelity account online or open the Fidelity mobile app, go to Account Settings, and look for the option to upgrade to margin. Fidelity will ask you to agree to the margin agreement, which outlines the interest rates, fees, and rules for borrowing.

Fidelity requires a minimum of $2,000 in your account to open a margin account. This is a regulatory requirement set by the Financial Industry Regulatory Authority (FINRA), not just a Fidelity rule. Once your margin account is approved, you can begin shorting stocks when ready, though Fidelity may review your process and contact you if they need more information about your trading experience.

How to place a short sale order on Fidelity's platform

To short a stock on Fidelity, go to the stock's quote page and click "Trade" or "Order." In the order entry screen, you'll see a dropdown menu that says "Buy" or "Sell." Click on "Sell" and then look for an option that says "Sell Short" — this is different from a regular sell order because you're selling shares you don't currently own.

Enter the number of shares you want to short and the price at which you want to sell (or select "Market" to sell at the current price). Review the order summary, which will show you the estimated proceeds and any applicable fees. Click "Preview Order" to double-check everything, then click "Submit" to send the order to the market.

Not all stocks can be shorted on Fidelity. Stocks that are hard to borrow, newly listed, or subject to a short-sale ban may not be available. If you try to short a stock that isn't available, Fidelity will show you an error message. You can call Fidelity's trading desk at 1-800-343-3548 to ask whether a specific stock is shortable.

Understanding margin requirements and interest charges

When you short a stock, Fidelity requires you to keep a certain amount of cash or securities in your account as collateral. This is called your margin requirement, and it's typically 50 percent of the value of the short position when you open it. If you short $10,000 worth of stock, you need at least $5,000 in cash or other securities in your account.

Fidelity also charges you interest on the borrowed shares every day your position is open. The interest rate depends on the stock's borrow rate — stocks that are hard to find pay higher rates — and the size of your short position. You can see the current borrow rate for any stock by looking at the stock's details page on Fidelity's website. Interest is deducted from your account automatically and compounds daily.

Your account must maintain at least 25 percent of the short position's value in equity at all times. If your account balance drops below this level, Fidelity will issue a margin call and may force-close your position to bring your account back into compliance. This can happen quickly if the stock price rises sharply.

Closing a short position by covering your shares

To close a short position, you buy back the shares you borrowed — this is called covering the short. Go to the stock's quote page, click "Trade," and select "Buy" from the dropdown menu. You don't need to select "Buy to Cover" on Fidelity's platform; a regular buy order will automatically close your short position if you own fewer shares than you've shorted.

You can cover your short position at any time while the market is open. If the stock price has fallen since you shorted it, you'll make a profit on the difference. If the stock price has risen, you'll take a loss. Once your buy order fills, your short position is closed and you no longer owe Fidelity the borrowed shares or any interest on them.

If you don't manually cover your short position, Fidelity may force-close it during a margin call or if the stock becomes unavailable to borrow. You have no control over when this happens, so it's important to monitor your positions and your account balance regularly.

Dividends and corporate actions on shorted stocks

When you short a stock, you're responsible for paying any dividends that are declared while you hold the position. If the company pays a $1 dividend per share and you're short 100 shares, $100 will be deducted from your account. This payment goes to the person or entity that actually owns the shares you borrowed.

Stock splits, reverse splits, and other corporate actions also affect your short position. If a stock you've shorted splits 2-for-1, the number of shares you owe will double and the price per share will be cut in half. Fidelity handles these adjustments automatically, but you should review your position after any corporate action to make sure it's correct.

Risks and limits of shorting on Fidelity

Shorting is one of the riskiest trading strategies because your losses can be unlimited. If you short a stock at $50 and it rises to $100, $200, or higher, you're losing money on every dollar of increase. You must eventually buy the shares back at whatever price they're trading at, no matter how high.

Fidelity may also recall the shares you've borrowed if the lender needs them back. This forces you to cover your position when ready, even if you don't want to. Additionally, some stocks are subject to short-sale restrictions or bans, which prevent new short positions from being opened. Fidelity will tell you if a stock is restricted when you try to place the order.

Margin calls can force your position closed at a loss if the stock price rises and your account balance falls below the maintenance requirement. You have limited time to respond to a margin call — usually one business day — and if you don't deposit more cash or securities, Fidelity will liquidate your positions without asking your permission.

Frequently Asked Questions

Can I short a stock in a regular cash account on Fidelity?

No. You must have a margin account to short stocks. A cash account only lets you buy and sell securities you already own. If you have a cash account, you'll need to upgrade to a margin account first, which requires a minimum of $2,000.

What happens if I can't cover my short position?

If you don't have enough cash to buy back the shares, Fidelity will issue a margin call. If you don't deposit more money or securities within one business day, Fidelity will force-close your position by buying back the shares at the current market price. You'll be responsible for any loss.

Do I have to pay taxes on short sale profits?

Yes. Profits from short sales are taxed as capital gains. If you hold the short position for less than one year, it's taxed as a short-term capital gain at your ordinary income tax rate. If you hold it longer than one year, it's taxed as a long-term capital gain at a lower rate. Consult a tax professional for your specific situation.

Can Fidelity force me to cover my short position?

Yes. Fidelity can force-close your position if you receive a margin call and don't respond, if the stock becomes unavailable to borrow, or if regulatory restrictions are placed on the stock. You have no control over the price at which your position is closed.

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

A short sale is straightforward borrowing and selling a stock. A short squeeze happens when a stock price rises sharply, forcing short sellers to cover their positions quickly to avoid larger losses. This buying pressure can push the price even higher, creating a cycle that hurts short sellers.