Why can't I short a stock that sells for less than $5? Is there another way to “go short” on them?
I think George's answer explains fairly well why the brokerages don't allow this - it's not an exchange rule, it's just that the brokerage has to have the shares to lend, and normally those shares come from people's margin, which is impossible on a non-marginable stock. To address the question of what the alternatives are, on popular stocks like SIRI, a deep In-The-Money put is a fairly accurate emulation of an actual short interest.  If you look at the options on SIRI you will see that a $3 (or higher) put has a delta of -$1, which is the same delta as an actual short share. You also don't have to worry about problems like margin calls when buying options.  The only thing you have to worry about is the expiration date, which isn't generally a major issue if you're buying in-the-money options... unless you're very wrong about the direction of the stock, in which case you could lose everything, but that's always a risk with penny stocks no matter how you trade them. At least with a put option, the maximum amount you can lose is whatever you spent on the contract.  With a short sale, a bull rush on the stock could potentially wipe out your entire margin.  That's why, when betting on downward motion in a microcap or penny stock, I actually prefer to use options.  Just be aware that option contracts can generally only move in increments of $0.05, and that your brokerage will probably impose a bid-ask spread of up to $0.10, so the share price has to move down at least 10 cents (or 10% on a roughly $1 stock like SIRI) for you to just break even; definitely don't attempt to use this as a day-trading tool and go for longer expirations if you can. A bit of poking around brought me to this thread on the Motley Fool, asking the same basic question: I think the problem is the stock price. For a stock to be sold short, it has to be marginable which means it has to trade over $ 5.00. The broker, therefore, can't borrow the stock for you to sell short because it isn't held in their clients' margin accounts. My guess is that Etrade, along with other brokers, simply exclude these stocks for short selling. Ivestopedia has an explanation of non-marginable securities. Specific to stocks under $5: Other securities, such as stocks with share prices under $5 or with extremely high betas, may be excluded at the discretion of the broker itself. Timothy Sykes specializes in this type of trade, according to his website. He has some recommendations for brokers that allow shorting low-priced stocks: If this is the initial transaction, the rules of a short margin account say that if you shorted 1000 share of ABC at $5/share your credit balance would be $5000 from the short plus you would have to put up yourself $5000 cash or $10,000 of marginal securities. So this is not really leveraging using margin. You have to put in just as much as the short generates. Is that what this relates to? Once the initial purchase has been made the minimum maintenance for a stock trading under $5 per share is 100% of the short market value in the margin account or $2.50 per share whichever is greater. For stock trading at $5/share or greater the minimum maintenance requirement is $5/share or 30% of the short market value, whichever is greater. The minimum maintenance requirements can be tighter.
I don't know what restrictions are put on the average employee at your company. In my case, we were told we were not permitted to either short the stock, or to trade in it options.  That said, I was successful shorting the exact number of shares I'd be buying at the 6 month close, the same day the purchase price would be set. I then requested transfer of the stock purchase to my broker where the long and short netted to zero.  The return isn't 15%, it's  100/85 or 17.6% for an average 3 months they have your money. So do the math on APR. (Higher if the stock has risen over 6 months and you get the lower price from 6 months prior.) My method was riskless, as far as I am concerned. I did this a dozen times. The stock itself was +/- 4% by the time the shares hit, so in the end it was an effort, mostly to sleep better. I agree with posts suggesting the non-zero risk of a 20% 4 day drop. In terms of pricing the asset, this functions in exactly the same way as a regular sell, so bids will have to be hit to fill the trade. When shorting an equity, currency is not borrowed; the equity is, so the value of per share liability is equal to it's last traded price or the ask if the equity is illiquid. Thus when opening a short position, the asks offer nothing to the process except competition for your order getting filled. Part of managing the trade is the interest rate risk.  If the asks are as illiquid as detailed in the question, it may be difficult even to locate the shares for borrowing. As a general rule, only illiquid  equities or those in free fall may be temporarily unable for shorting. Interactive Brokers posts their securities financing availabilities and could be used as a proxy guide for your broker. "A simple way to ask the question might be to say ""why can't I just use the same trick with my own shares to make money on the way down? Why is borrowing someone else's shares necessary to make the concept a viable one? Why isn't it just the inverse of 'going long'?"" A simple way to think about it is this: to make money by trading something, you must buy it for less than you sell it for.  This applies to stocks like anything else.  If you believe the price will go up, then you can buy them first and sell them later for a higher price.  But if you believe the price will go down, the only way to buy low and sell high is to sell first and buy later.  If you buy the stock and it goes down, any sale you make will lose you money. I'm still not sure I fully understand the point of your example, but one thing to note is that in both cases (i.e., whether you buy the share back at the end or not), you lost money.  You say that you ""made $5 on the share price dropping"", but that isn't true at all: you can see in your example that your final account balance is negative in both cases.  You paid $20 for the shares but only got $15 back; you lost $5 (or, in the other version of your example, paid $20 and got back $5 plus the depreciated shares). If you had bought the shares for $20 and sold them for, say, $25, then your account would end up with a positive $5 balance; that is what a gain would look like.  But you can't achieve that if you buy the shares for $20 and later sell them for less. At a guess, you seem to be confusing the concept of making a profit with the concept of cutting your losses.  It is true that if you buy the shares for $20 and sell them for $15, you lose only $5, whereas if you buy them for $20 and sell for $10, you lose the larger amount of $10.  But those are both losses.  Selling ""early"" as the price goes down doesn't make you any money; it just stops you from losing more money than you would if you sold later." Depends on the stock involved, but for the most part brokerages allow you gain entry at 50%, meaning you can short twice the cash on hand you have.   Going forward, you need to maintain 30%, so on a $10,000 short, you'd have to maintain $3000 in your account. Example, an account with $5000 cash - You can short $10,000 securities.  Let say 100 shares of xyz at $100 per share. After trade settles, you won't receive a margin call until your balance falls to $3000, probably right around the time xyz rises to $120 per share.  Riskier stocks will have higher margin maintenance requirements - leveraged vehicles like FAS/FAZ (triple leveraged) require 90% margin (3x30%) if they are allowed to be 'shorted' at all. "The process of borrowing shares and selling them is called shorting a stock, or ""going short.""  When you use money to buy shares, it is called ""going long."" In general, your strategy of going long and short in the same stock in the same amounts does not gain you anything.  Let's look at your two scenarios to see why. When you start, LOOT is trading at $20 per share.  You purchased 100 shares for $2000, and you borrowed and sold 100 shares for $2000.  You are both long and short in the stock for $2000.  At this point, you have invested $2000, and you got your $2000 back from the short proceeds.  You own and owe 100 shares. Under scenario A, the price goes up to $30 per share.  Your long shares have gone up in value by $1000.  However, you have lost $1000 on your short shares.  Your short is called, and you return your 100 shares, and have to pay interest.  Under this scenario, after it is all done, you have lost whatever the interest charges are. Under scenario B, the prices goes down to $10 per share.  Your long shares have lost $1000 in value.  However, your short has gained $1000 in value, because you can buy the 100 shares for only $1000 and return them, and you are left with the $1000 out of the $2000 you got when you first sold the shorted shares.  However, because your long shares have lost $1000, you still haven't gained anything.  Here again, you have lost whatever the interest charges are. As explained in the Traders Exclusive article that @RonJohn posted in the comments, there are investors that go long and short on the same stock at the same time.  However, this might be done if the investor believes that the stock will go down in a short-term time frame, but up in the long-term time frame.  The investor might buy and hold for the long term, but go short for a brief time while holding the long position. However, that is not what you are suggesting.  Your proposal makes no prediction on what the stock might do in different periods of time.  You are only attempting to hedge your bets.  And it doesn't work.  A long position and a short position are opposites to each other, and no matter which way the stock moves, you'll lose the same amount with one position that you have gained in the other position.  And you'll be out the interest charges from the borrowed shares every time. With your comment, you have stated that your scenario is that you believe that the stock will go up long term, but you also believe that the stock is at a short-term peak and will drop in the near future.  This, however, doesn't really change things much.  Let's look again at your possible scenarios. You believe that the stock is a long-term buy, but for some reason you are guessing that the stock will drop in the short-term.  Under scenario A, you were incorrect about your short-term guess.  And, although you might have been correct about the long-term prospects, you have missed this gain.  You are out the interest charges, and if you still think the stock is headed up over the long term, you'll need to buy back in at a higher price. Under scenario B, it turns out that you were correct about the short-term drop.  You pocket some cash, but there is no guarantee that the stock will rise anytime soon.  Your investment has lost value, and the gain that you made with your short is still tied up in stocks that are currently down. Your strategy does prevent the possibility of the unlimited loss inherent in the short.  However, it also prevents the possibility of the unlimited gain inherent in the long position.    And this is a shame, since you fundamentally believe that the stock is undervalued and is headed up.  You are sabotaging your long-term gains for a chance at a small short-term gain." With a short position you make your money (profit) when you buy the stocks back to close the position at a lower price than what you bought them at. As short selling is classed as speculation and not investing and you at no time own any actual assets, you cannot donate any short possition to charity. If you did want to avoid paying tax on the profits you could donate the proceeds of the profits after closing the position and thus get a tax deduction equal to the profits you made. But that raises a new and more important question, why are you trading in the first place if you are afraid to make profits in case you have to pay tax on those profits? This is a gross simplification as there are a few different ways to do this. The principle overall is the same though. To short a stock, you borrow X shares from a third party and sell them at the current price. You now owe the lender X shares but have the proceeds from the sale. If the share price falls you can buy back those shares at the new lower price, return them to the lender and pocket the difference. The risk comes when the share price goes the other way, you now owe the lender the new value of the shares, so have to find some way to cover the difference. This happened a while back when Porsche made a fortune buying shares in Volkswagen from short sellers, and the price unexpectedly rose. The point of short-selling as a separate instrument is that you can you do it when you can't sell the underlying asset... usually because you don't actually own any of it and in fact believe that it will go down. Shorting allows you to profit from a falling price. Another (non-speculative) possibility is that you don't have the underlying asset right now (and thus can't sell it) but will get it at a certain point in the future, e.g. because it's bonds that you've used to guarantee a loan... or grain that's still growing on your fields. "You can't short a stock unless there is someone willing and able to ""lend"" shares to you. And there are several reasons why that might not be the case. First, BSFT is a ""new"" stock, which means that NO ONE has held it very long. It's much easier to short IBM or Exxon Mobil, where there are some long-term holders who would like to earn a little extra money lending you THEIR shares. But if ""everyone"" involved is busy buying or selling the stock, there won't be many people to lend it. That's not manipulation, that's just the market. Another reason may be a large ""short"" interest. That is many OTHERS have shorted it before you. That's dangerous for you, because if some lenders want to pull their shares off the market, they can cause a ""short squeeze"" that will drive the price much higher.  And stock shortages can be orchestrated by the company or large investors to artificially drive the price higher. Unless you have a lot of experience, don't try shorting small cap stocks. Try to gain some experience with large caps like IBM or Exxon Mobil first. Those are stocks that people at least can't ""play games"" with. YOu will win or lose based on the market itself." "&gt; It just has to finish below the strike price of the short (which can be higher than the stock's current price).  You're talking about a put option.   That's one ""short"" strategy, but it's not shorting a stock, so the terminology is a little jumbled.   There are reasons to not do straight options, because they can be quite risky, and you have to get the time frame correct." Your original example is a little confusing because just shorting for 1k and buying for 1k is 100% leveraged or an infinitive leverage ratio. (and not allowed) Brokerage houses would require you to invest some capital in the trade.  One example might be requiring you to hold $100 in the brokerage.  This is where the 10:1 ratio comes from. (1000/10) Thus a return of 4.5% on the 1000k bond and no movement on the short position would net you $45 and voila a 45% return on your $100 investment. A 40 to 1 leverage ratio would mean that you would only have to invest $25 to make this trade.  Something that no individual investor are allowed to do, but for some reason some financial firms have been able to. "And what exactly do I profit from the short? I understand it is the difference in the value of the stock. So if my initial investment was $4000 (200 * $20) and I bought it at $3800 (200 * $19) I profit from the difference, which is $200. Do I also receive back the extra $2000 I gave the bank to perform the trade? Either this is extremely poorly worded or you misunderstand the mechanics of a short position.  When you open a short position, your are expecting that the stock will decline from here.  In a short position you are borrowing shares you don't own and selling them.  If the price goes down you get to buy the same shares back for less money and return them to the person you borrowed from.  Your profit is the delta between the original sell price and the new lower buy price (less commissions and fees/interest).  Opening and closing a short position is two trades, a sell then a buy.  Just like a long trade there is no maximum holding period. If you place your order to sell (short) 200 shares at $19, your initial investment is $3,800.   In order to open your $3,800 short position your broker may require your account to have at least $5,700 (according to the 1.5 ratio in your question).  It's not advisable to open a short position this close to the ratio requirement.  Most brokers require a buffer in your account in case the stock goes up, because in a short trade if the stock goes up you're losing money.  If the stock goes up such that you've exhausted your buffer you'll receive what's known as a ""margin call"" where your broker either requires you to wire in more money or sell part or all of your position at a loss to avoid further losses.  And remember, you may be charged interest on the value of the shares you're borrowing. When you hold a position long your maximum loss is the money you put in; a position can only fall to zero (though you may owe interest or other fees if you're trading on margin).  When you hold a position short your maximum loss is unlimited; there's no limit to how high the value of something can go.  There are less risky ways to make short trades by using put options, but you should ensure that you have a firm grasp on what's happening before you use real money. The timing of the trades and execution of the trades is no different than when you take a plain vanilla long position.  You place your order, either market or limit or whatever, and it executes when your trade criteria occurs." In the real world, there are only two times you'll see that 5% become worth anything - ie, something you can exchange for cash - 1) if another company buys them; (2) if they go public. If neither of these things happen, you cannot do anything with the stock or stock options that you own. &gt; A short position also loses money if the stock just appreciates more slowly than the broader market, which is one way an overvaluation can correct itself.  Is there a derivative based on the literal second derivative (acceleration) of the stock price? If so, you'd be able to short those, yes? The main source is a direct feed from the stock market itself. The faster the feed, the more expensive. 15-minute delay is essentially free... and for those of us who do long-term investment is more than adequate.  If you want data sooner, sign up with a brokerage that provides that service as part of what you're paying them for... and remember that every bit you spend on services is that much more profit you have to make just to break even, so there's a real tradeoff.