Sunday, March 7, 2010

Short Selling Account

What type of account do I need in order to sell a stock short?

There are most likely two types of accounts that your broker will offer you: a cash and a margin account. In order to be able to short stocks you will need to have a margin account. This means that your account will be able to use funds loaned to you (at interest) by your broker. This is necessary for your broker to keep your short position open because you are going to borrow a stock, sell it and receive the proceeds from it but will still need to eventually "cover" this position by buying back to cover.

Your broker will ensure that you will eventually cover your position by monitoring your margin (i.e. the collateral for your short position) and this is done through a margin account. In a cash account you can not sell short and you can not use margin to buy stock with borrowed funds. We will talk about margin in more detail in a subsequent article.