The Best Brokers for Short Selling
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Traders who speculate on a price decline generally short-sell stocks. But speculators aren’t the only ones who short-sell, it is also popular with gamblers, hedgers, and individual investors who think they might benefit from taking a risk.
Shorting stock, also referred to as short selling, is when stock is sold in the hopes of being bought back later at a cheaper price. The concept of short-selling isn’t limited to stock though, you can also buy put options, which fulfills the same purpose; speculating or expecting the price to go down.
When you short sell stock, you sell stock that you borrow from your stockbrokers and leave an open short position. The position closes when you re-buy the stock, hopefully at a cheaper rate, and thereby making a profit.
Hopefully the stock doesn’t increase in value which would be the not so ideal situation and would result in a loss. This real possibility makes short selling a risky business with some important rules and strategies to help you succeed.
Like everything in this industry, a broker can make or break you, and they vary hugely when it comes to tools, services, fees and customer service. All of which are hugely important and dependent on your trading style.
Most importantly, you’ll want a broker that has low fees and easily borrowed stocks. For these reasons, we’ve chosen Interactive Brokers as the best overall broker for short-traders.
In this article, we will also take you through how short-selling can be profitable, how you can strategize to get the best results, and the potential risks involved for short-sellers.
Interactive Brokers Group (IBKR) is our top pick for Best Broker for short-selling and offers customers the lowest margin rate in the industry.
IBKR works from the trade date to the settlement date to offer traders automated trading solutions. The firm offers customers transparent rates, a Stock Yield Enhancement Program, a Stock Loan Borrow tool, an availability list, and much more.
- Transparent pricing
- Impressive tools for short selling
- Wide variety of shareable stocks
- Inactivity fees with IBKR Pro (but not IBKR Lite)
- Website navigation can be difficult
Stock Availability Overview
All traders know that come trade date, the priority is availability. International Brokers availability helps customers locate securities that are difficult to borrow, while also protecting them from buy-ins and recalls.
Here are two ways you can see shares that are available for shorting immediately:
- You can see how many shares are available for shorting, in addition to interest rates charged on borrowed shares, and the Fed Funds rate at the time. You can find all of this in the firms Trader Workstation. Simply add the Shortable Shares, Fee Rate and Rebate Rate columns.
- You can also search for availability of shortable stocks in real-time by using IBKRs automated Short Stock Availability Tool that notifies you when a security that you were looking to short becomes available.
Interactive Brokers securities financing services offer transparency and efficiency for the stock loan and borrow markets with their automated pricing tools and greater ‘credit-worthiness’.
The firm’s stock loan and borrow prices are competitive, and they use the available market data to measure and stay on top of this.
A variety of high-quality sources are used to develop their prices, and all are visible, along with their security availability in the firms automated securities financing tools.
Interactive brokers also shows the charted daily rate history and intraday time and sales of stock loan fees in their SLB rates window which can’t be underestimated.
Best of all, the broker offers low commissions on stock, options, futures, forex, and a tiered pricing structure.
For example, a balance over 1,000,000 would be charged at the Tier l rate, and the subsequent 900,000 at the Tier ll rate. This will help with decreasing the overall costs involved with short-selling.
IBKR charges a daily interest rate and posts actual interest monthly on the 3rd business day of the following month – put it in your diary!
In addition, IBKR offers margin interest on high net-worth accounts that can be as low as 50 bps above the market-determined, overnight rates.
In addition to their key services Interactive Brokers offers account management, asset management and securities funding.
Most importantly for short traders; You can avail of the lowest margin rates in the industry with an equity transaction costing only $2.34 per trade. Options trades have no set base costs, and commissions will cost $.69 per contract.
Although these are great fees, when you’re making lots of trades a day, they can all add up, so be sure to keep track of them.
What is the Price of Borrowing Stock: Stock Loan Borrow Tool
To sell stock short, IBKR locates and borrows shares to deliver it to the buyer at settlement.
The cost of borrowing the shares will depend on how much of the shares there are available to borrow, and how in demand they are from other short-sellers that are looking to do the same.
In order to help you estimate how much you will need to pay to borrow a stock before entering your order, you can use IBKR’s handy Stock Loan Borrow (SLB) rates tool.
This tool shows charted daily rate history, along with intraday time & sales of stock loan fees, and a bar graph of historical rates for 10 days prior. It’s an automated tool that’s very efficient and good to have in your arsenal.
The firm will also provide indicative borrow rates when possible. These are the rates that the dealer in the Securities Lending/Borrowing Market are open to transacting.
All transactions will be settled 3 business days after their execution at which time you might find the borrow rates changing, which may be significantly.
IBKR provides a couple of sophisticated and automated tools for traders in the securities lending services.
The firm’s stock, loan and borrow tools include:
- Stock Yield Enhancement Program
- Short Stock Availability
- Pre-Borrow Program
- FYI Notifications
The Stock Yield Enhancement Program lets you earn some cash on the fully-paid shares of stocks held in your account.
The Short Stock Availability tool allows you to search for short stocks that are available in real-time, with their electronic, self-service tool.
The firms Pre-Borrow Program will help minimize the chances of being bought-in on settlement dates, and they will even provide notifications to let you know if a stock that you were looking at becomes available.
Short Stock Availability
IBKR’s Short Stock Availability tool is a self-service, electronic one, where you can search for shortable stocks as stats are updated throughout the day to show real-time availability. It’s easily accessible and lets you do the following;
- See the amount available, the current borrowing rate, and the number of lenders.
- View historical borrow rates.
- Search for shortable stock by groups such as, exchange or symbol.
The shortable stocks listed are there to help users only, and it may change. Please note that IBKR state that they do not take any orders for the short-sales of any US stocks that do not meet the requirements for DTC continuous net settlement, and that orders for short sales must first be approved by the firm before going ahead.
Stock Yield Enhancement Program
This program helps traders and investors make some extra cash by lending your “fully-paid” shares of stock in your account for short selling. In short, (excuse the pun) IBKR will pay you if you agree to lending them shares.
The firm’s SmartRouting order execution system sweeps the market to find the best market rates for stocks, options and combinations, and you will be paid interest for each day the stock is out on loan.
The Stock Yield Enhancement Program is free to use by Interactive Brokers customers who have a margin account, or who have a cash account with equity above $50,000 USD.
All stocks must be “fully-paid”, which means that they are not held on margin, or “excess margin” – Stocks that are held on margin but their market value is greater than 140% of your margin debit balance.
Interactive Brokers lets you pre-borrow shares to help reduce the chances of being bought-in settlement date. You can join as long as you have a Portfolio Margin account and once you’re in you can pre-borrow stocks if you think you might short-sell later using their Stock Borrow Loan feature.
This can help prevent a buy-in because it ensures that shares are available to short before you put on a short sale. Without this pre-borrow it is hard to know for sure if shares have been procured before the short sale settles.
Check Whether a Stock is Shortable on TWS
Interactive brokers note several public sites that traders can use to check stock loan data, where no login details are needed.
Users will first need to select the country that their stock is listed, at which point a list of available shorted stocks will appear; if there’s too many, they will appear in groups.
You can then use the search box to look for a particular query including, the product description, currency of denomination and the quantity of shares open for borrowing.
Is Interactive Brokers the One for You?
Seasoned traders will benefit most from Interactive Brokers short-selling offerings, but newer traders will enjoy its research section, Traders Academy, webinars and informative videos, too.
You might also love their Traders Insight, Market Pulse and IBKR Quant Blog that you can access in their IBKR Expert Community.
Considerations and Risks
IBKR highlight several considerations and risks to be aware of when using their programs to short-sell which include;
- Shares loaned possibly not being protected by SIPC, which is why the firm has to provide you with cash collateral in the same amount as the value of your shares in case you don’t get your stock back.
- Shares loaned are generally used for short-selling.
- Loan rates and any interest you receive will change regularly in either direction by as much as 50%, or more.
A Short Guide to Short-Selling: Strategies, Risks, and ABCs
Short-selling poses the potential for unlimited loss and because of that, it should be left to more experienced traders.
If that’s you and you want to learn more about shorting in order to make more informed decisions then read on.
Below we’ve written some quick pointers on how you can make a profit from short-selling, how you can strategize to set yourself up for a greater chance of success, as well as going into some more detail about the potential risks involved.
How is Short-Selling Profitable?
Short sellers believe that when a stock’s price is about to go down, it makes sense to borrow and sell the stock now before it does, and then buy it back later and a cheaper price.
If this turns out to be true, they’ll earn a profit dependant on the difference between their selling and re-buying price.
While some traders are simply speculators, ie they enjoy the ‘betting’ side of things. Others do it as a form of hedging, to protect themselves from any risks of huge losses.
Shorting ABC Shares
If you believe that the value of ABC shares are overvalued, and for this reason you believe that the stock will crash relatively soon, you can sell the shares at their current price and hope you can buy them back later for less to make a profit.
To do this, you go ahead and sell 20 borrowed shares at $50 each, earning $1,000 in cash.
For simplicity in this example, we will exclude any fees that may need to be paid.
You now have an obligation to re-buy the 20 shares of ABC stock, not at any particular date, but at some stage, and return them to your broker.
If your stock increases to $100 per share, it would cost you $2,000 to buy back the 20 shares. This would result in a loss of $1,000. If however, your shares decrease in value to $10 then you’ll make $800 in profit.
How Short-Selling Affects the Market
Short selling plays an important role in the liquidity of the stock market. If a stock is believed to be overvalued, a short-seller may sell the stock to bring its value down.
Shortselling also has other market benefits such as creating a higher liquidity, which gives short-term traders, day traders, more opportunities. This can result in better bid/offer spreads that bring down overall costs to more active day traders.
With this, short-selling stocks increases capital and reduces the likelihood of recessions because it brings the asset back to its real value in the market.
3 Strategies for Short-Selling
Traders always have the open to go short in a liquid market with no real restrictions. With that in mind, there are three ways that help short-sellers win:
- When a stock is on its way down, at some point it might moderately increase again, if you’re quick and on your toes then this is a good time to sell.
- Sometimes, a security might be switching between a consistent high and low. If you can sell during a high then you can be ready to rebuy at the low.
- Often, a security might be actively lowering throughout the day. Some traders catch onto this quickly and sell their stock before it hits its lowest point at the end of the day.
Beware of the Risks
Some people may not realise that when you sell a stock short you can’t just buy it back whenever you want at a suitable price because the market might not be there for that stock.
Perhaps no one is selling the stock, or there are a number of people looking to buy it. Maybe some of those people are panic buyers because short sellers are trying to close out there positions before they lose too much money.
You might suddenly hear that a company will be acquired at a 35% premium over the current stock price, and there will be a $15 per share dividend. This will instantly result in a huge loss for short-sellers.
The best short-sellers are aware that the stock market is volatile and often can go from a serious low to a serious high without any middle-ground.
This volatility may not give you the opportunity to buy during a price low or high because it might instantly change again.
Losses on short-selling are unlimited because there is no limit on how high a stock price can rise. For this reason, short-selling should only be attempted by traders with a lot of experience in, and a good understanding of the market and potential risks.
What to Look for in a Broker for Short Selling
To help you make the best decision when looking for a broker make sure to check if the broker has a wide selection of stock, or access to a stock loaner that can provide stock for you.
How to Get Started Short-Selling
To begin short-selling, you will need a margin account that is prerequisite to entering short-selling orders because you will need to borrow stock with a potential for unlimited loss.
If you currently have a cash account type with Interactive Brokers that doesn’t allow borrowing, and you would like to upgrade your account to a margin account, you can simply go to Interactive Brokers’ client portal, select the settings tab and then the account settings option.
You should see a screen that allows you to request the account change. It will then go under review to be approved by the Compliance Officer before a change is made.