Sunday, March 7, 2010

Short Selling Mechanics

How do I actually short a stock?

Your broker's interface will include an optional similar to "Buy" or "Sell" which will be called something like "Short" or "Sell Short" (to open a short position) along with "Buy to cover" (to close out a short position). This can be done (broker-assisted) over the phone as well, usually for an extra fee.

What will happen when I hit the "short" button?
This varies depending on the broker but most will execute what is called a "Locate". A "Locate" is simply your broker trying to locate shares of the stock you want to short to ensure that your broker can actually borrow the stock for you to sell it and initiate the short transaction.

What if my broker does not have an inventory of stock for me to short?
Your broker in most cases has an internal inventory and when they execute a "locate" it will try to go externally to try and find the stock you want to short (so you can borrow the shares and sell them in the open market). If they can not locate the shares for you to short, the "locate" will fail and you will not be able to short.