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How to Short Stocks on Robinhood (…Is It Even Possible??)

So your portfolio is doing well, until it isn’t… The world takes a tumble, or a sector falls apart, and you’re holding the financial pieces. When you realize you’re exposed to an abundance of volatility, you might be wondering what you can do to mitigate the risk. Is shorting stocks the answer? What does that even mean? And what’s the low-down on how to short stocks on Robinhood?

We can help you create a picture of what it looks like utilizing the “other side of the market” in the article below.

Read on for the nitty gritty of short selling on Robinhood.

This article was written by our fabulous staff writer, Lindsey Smith.

Related: Webull vs Robinhood: 2022 Comparison (Which is best??)

How to Short Stocks on Robinhood with ETFs and PutsWhat Does It Mean to Short a Stock?

You’ve heard the phrase…but what does it mean to short a stock?

Shorting a stock, or short selling, is a way to make a profit when stock prices go down.

You can look at shorting as betting against an individual stock or the market as a whole, while they actively try to prove you wrong.

Shorting a stock is a trading strategy where you, the investor, sells a security today, and then buys it back in the future, hoping that the price will go down. It’s the inverse of the long trade advice of “buy low, sell high”. You’re borrowing stocks at a high price, and then buying them back to return later at a lower price.

This strategy is not recommended for new traders, it comes with a lot of risk and a good knowledge of how trading and the markets work is needed so you don’t lose money. It requires more attention and you need to be disciplined.

With the traditional long trade model, your profit can theoretically go up forever. As the price grows, your profit grows, and if the price falls, you can only lose what you’ve invested.

The opposite is true for short stocks.

The amount you can lose is theoretically infinite. As the price of the stock rises, the amount required to buy them back to return to your lender can go up and up and up. 

How to Short a Stock

The first thing you’ll need to short a stock is a margin account, which is different from a regular trading account.

What is a Margin Account?

A margin account allows you to borrow stock and leverage it. Usually you’ll need a minimum amount in your margin account to be able to short stocks. It’s typically around 50% as a buffer in the event your investment loses value. This money still belongs to you, but is held by the broker as collateral to make sure you can cover your short.

Sometimes brokerages have a specific amount, such as $2,000 that needs to be in the account before you can short, so check with your platform and see what’s required.

How do you sell a stock you don’t own?

Now, how do you sell a stock you don’t own? You’ll need to borrow it from your broker. They’ll have to borrow it from a portfolio they’re managing.

When you sell your borrowed stock (the first step), you’ll be left with the proceeds of that sale. This money doesn’t belong to you (yet), but when you cover your short, or buy back the stocks at a (hopefully) lower price, you’ll return the stocks you borrowed from your broker and keep the net profit for yourself.

What is a margin call?

You will also be responsible for something called margin calls.

A margin call is a process that happens when the margin (the deposit in your margin account) becomes insufficient. Let’s say you lose the amount that’s equivalent to what you put down for your initial margin. You’ll be required, through a margin call, to refill your cash buffer to the maintenance margin (usually 30%) because there’s no more wiggle room in your margin account to cover losses.

How to short stockThe risks of shorting a stock

Short positions also come with unique fees and costs that traditional long investors don’t face. If the stock you borrowed happens to pay dividends, then you’ll have to pay that amount to your broker.

Shorts also charge an interest rate on the value of the stock you borrowed, much the same as a bank charges you interest on a monetary loan. These typically range from 2.5% to 20%, but can be higher on hard to borrow stocks that are highly volatile.

There are other disadvantages to short selling…

Short strategies face buy-in risk, which is the chance that a broker will make you cover your position early.

There are a few reasons why this can happen, things like your broker may need to return the stock from the portfolio they borrowed it from, or the stock might see a surge in demand. Either way you would have to cover your short at whatever time they ask, which might not be advantageous to you.

You might also get caught in a short squeeze. This is when stocks that are heavily shorted (looking at you, Tesla) see their price surge because all of the investors shorting the stock need to cover their position. If everyone buys the stock back at around the same time, it can lead to a spike in the price, making it harder to cover your position without realizing a loss.

The biggest risk comes from their skewed payoff. You have the potential to lose far more than you’ve initially invested. As we talked about above, you can potentially lose an infinite amount of money if the stock happens to recover, take off, and do well. 

Related: How Much Do You Need to Invest in Robinhood? (Not Much!!)

Can You Short a Stock on Robinhood?

Now that you understand what shorting a stock is, and how to do it, can you short a stock on the Robinhood platform?

Technically, no.

At this point in time, shorting a stock on Robinhood isn’t possible, even with a Gold Membership. Though it sounds like you can, since a Gold Membership is essentially a margin account, it’s used for leveraging returns and not shorting stocks.

However, there is a way to do something similar to a short sell on Robinhood, and that’s by using inverse ETFs or put options.

How Do You Short a Stock on Robinhood?

Is there another way to short a stock? How do you short a stock on Robinhood?

If you want to try a similar route to shorting a stock while using Robinhood, you can use inverse ETFs or put options. 

Robinhood vs WebullHow to Short Stocks on Robinhood with Inverse ETFs

If you purchase shares of inverse ETFs, you can short whole markets. So you won’t be betting on individual stocks going down, but betting on the market as a whole going down.

Where most ETFs track markets and are good for holding over the long term, inverse ETFs are profiting off market drops, and are only good for short term holds.

In fact, you really only want to hold them for a day trade or swing trade, which is usually around a week. Any longer than that and the math says you will lose money, even if in the end the fund does what you want it to do. These are meant to be held in the short term to shore up any major exposure to volatility, and even then, they don’t always work.

Inverse ETF: SH

For example, SH, or ‘ProShares Short S&P 500’ ETF tries to inverse the mirror of the S&P 500. The S&P 500 is basically an index that tracks the largest 500 companies in the US. So when the S&P goes down by 1%, the SH will (in theory) go up by 1%.

Inverse ETF: SQQQ

Many of these funds are also leveraged, so you’ll find they have 2x and 3x leverage. That means if the S&P goes down by 1%, the SH goes up by 2% or 3%, depending on your leverage. One of the most popular choices for inverse ETFs is the SQQQ, or the ProShares UltraPro Short QQQ ETF. This is 3x leveraged and follows the NASDAQ 100.

Disadvantages of ETFs

Again, inverse ETFs come with a lot of disadvantages:

  • They have higher fees than regular ETFs, and need much more babysitting.
  • They involve a lot of trading and need employees to be actively making those trades, so they cost more to manage.
  • Plus you have to manage it and decide how long to hold it.

They also come with many different risks:

  • Short sale exposure risk,
  • credit risk,
  • compounding risk,
  • derivative securities risk,
  • and correlation risk are all at play.

Because of this, they really aren’t meant for people who don’t fully understand what they’re doing, or who aren’t comfortable with the potential losses.

Related: How to Buy Robinhood Stock (…And Is It a Good Buy??)

Stock market analysisHow to Short Stocks on Robinhood with Put Options

Another way you can short stocks on Robinhood is to use put options. This simply means buying “puts” to bet on stocks or markets going down.

Buying a put option allows you to sell a stock at a specified price within a certain time period. This specified price is called the strike price, and the option is only valid before the expiration date. What you pay to own the option is called its premium.

If the expiration date rolls around and your stock is trading above the strike price, it’s called being out of the money. And as it sounds, it’s not the place you want to be. It means you’re suffering the maximum loss, risking whatever you paid for the option.

If the expiration date comes and your stock is trading below the strike price, it’s called being in the money which is how you make a profit. Of course, the profit depends on how far below the strike price your stock is trading when the option expires or when you sell your put options.

Put Options: The potential payouts

Options have a 100:1 leverage. This means if your stock is trading at $1 below the strike price when the option expires, you wouldn’t make $1, you’d make $100. The further below the break even price, the more money you’ll make.

One advantage of put options is that you don’t have to wait until the expiration date to exit the short position.

Options are traded throughout the day like a stock, which means you sell it before it expires. If the stock starts to trade higher, you can sell early to cover a portion of what you paid before it gets out of hand. And the inverse is true too, if it trades lower, you can take your profits early.

Options are more confusing for people to wrap their head around, so choose a short option depending on your understanding and skill level. 

Related: Top Tech Index Funds in 2022 (…Will They Soar or Take a Dive??)

Where Can I Short a Stock?

Okay, so now you know all the work-around methods for how to short stocks on Robinhood. But you’d rather just do the real thing and short a stock directly.

What are the different brokerage options out there? Where can you actually short a stock?

Recap: What Is The Best Way to Short a Stock on Robinhood?

If we’re talking about shorting stocks on Robinhood, your most manageable risk is going to be buying put options. This is essentially leasing the downward price slide of a stock. You aren’t obligated to sell but you have the right to.

You don’t face the risk of a stock owner calling their shares back at any time, because you’re the owner of the put option, you get to decide when it’s sold or exercised. It also limits your cash loss risk with defined limits on price.

Advantages of Put Options with Robinhood

Other advantages of put options are that they’re typically allowed in retirement accounts, and shorting isn’t. You also don’t have to pay the dividend to a broker if the stock has one, since you’re the put owner.

The Major Disadvantage of Put Options with Robinhood

The major disadvantage of put options….They’re confusing! However, there’s a wealth of knowledge out there and anyone interested in quality shorting options can get comfortable with options and how they work.

If you’re looking for the easiest way to short a stock, you can use the inverse ETFs mentioned above.

Just login to your Robinhood app, and purchase shares of either SH or SQQQ. Just remember you’ll only want to hold them for a short time, so do what you need to do to remember that (I like to set alerts in my phone to remind me).

How to investHow to Short a Stock on Etrade

Want to short a stock for real instead of using inverse ETFs and put options? Want to know how to short a stock on Etrade

Here’s the step-by-step instructions

You’ll need a margin account setup with a minimum of $2,000 in it to be able to short stocks on Etrade.

  1. Sign in
  2. Click on trading at the top menu
  3. Put in the symbol of the stock you want to short 
  4. Pay attention to the bid and ask price. When the numbers are tight, for example, within a few cents, you might want to use a market order.
  5. Under action choose “sell short”
  6. Fill in the quantity of shares you want to short
  7. Under price type choose “limit” order, or market order if that’s what you’re doing (a limit order says “I want to sell this stock for no lower than a certain price”)
  8. Fill in your limit price. Start near the “ask” price, just a few cents shorter
  9. Choose your duration, usually “good for day” and then keep an eye on it
  10. If you do not want to accept partial orders, click the “all or none” box
  11. Click preview order and send it through. If it doesn’t get filled within a minute, cancel the order, come back to this page, and adjust the limit price down a few cents. Try again until it goes through.

How to Short a Stock on Webull

Interested in shorting a stock on Webull? Here’s the step-by-step process of how that’s done.

Like Etrade, you’ll need a margin account set up with at least $2,000 in it to start shorting stock on Webull.

  1. Find the order entry widget, across the top you’ll see the option to buy, sell or short. Choose “short”
  2. If you want to know which stocks are available and affordable to short, click widgets at the top right corner and then “quotes”. Search the ticker to find out if it’s shortable.
  3. Once you identify that the stock is shortable, choose the order type. Usually it’s “limit”, unless you’re doing a market order.
  4. Choose the quantity you want to purchase
  5. Enter your limit price
  6. Choose the duration of time
  7. Place the order

How to Short Stocks on Robinhood – Will You Use the Inverse ETF Method?

In my opinion, the best way to short stocks on Robinhood is to exercise put options.

They have far more advantages and fewer downsides than the inverse ETFs or than shorting a stock on another platform would have.

Inverse ETFs also have their place, and are especially useful to shore up your portfolio when it’s exposed to a lot of volatility.

Are you looking to short stocks? What are you looking at shorting? Tell us in the comments below!

Grow Rich Investing Money

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

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