If you do not already hold a long position and enter a sell order, your order will be handled as a short sale (as accounts cannot simultaneously hold both a long and short position in the same security). A short position will reflect in your portfolio with a negative sign as a negative position. Other terms of note concerning short selling are as follows:
- You must manage a “Margin” type account with net liquidation equity of at least $2,000 for a short sale order to be approved. Short sales are not accepted in “Cash” type accounts.
- Brokers are required to make reasonable intentness that shares you are selling can be borrowed in order to make delivery to the purchaser at settlement. This process is known as “locate” and, while it serves as an indication that shares can be borrowed, the borrow does not literally materialize until settlement. If shares are unavailable to borrow at the settlement date, regulations require that the broker close out your short position.
- Selling short stock requires the borrowing of stock (instead of cash) and lenders usually charge a fee to borrow expressed as an interest rate. The fee can differ by stock and change daily as it is a function of supply and demand. In the event of a stock being halted from trading, you may be unable to close your short position and will continue to experience borrow costs on your loan for the duration of the halt. For more details, see: How do I determine whether there is a cost to borrow a stock before entering a short sale order?
- Short selling poses unlimitide risk as there is no limit as to how high the stock price may increase when the position is eventually closed.