The ability to short a stock (to bet that it’s price will go down) can be a powerful tool to add to any portfolio. Especially from the perspective of a fundamental investor, who spends a lot of time researching individual companies, the ability to short a stock can lead to more opportunities and more gains. It allows them to profit from both the good and bad companies they’ve researched. This article will walk you through the process of short selling on TD Ameritrade.
What is Short Selling?
As we mentioned above, to short sell a stock is to make a bet that its price will go down from where you shorted it. Mechanically, when you short a stock your broker is essentially lending you the shares that they or another investor holds so that you can then sell them. When you close the short position, you are buying the shares that you borrowed back from the open market (hopefully at a lower price) and TD Ameritrade then returns them to the lender.
TD Ameritrade Short Selling Fees
There is no special pricing or surcharges for short selling stocks or ETFs on TD Ameritrade. The same rate of $0 applies.
What Are TD Ameritrade’s Requirements on Short Selling?
In order to short sell on TD Ameritrade, you must have a margin-enabled, non-retirement account with at least $2,000 in marginable equity.
The equity required to maintain your short position may vary based on the market price of the security you shorted, and if the short position moves against you your account could face a margin call, requiring you to deposit additional funds. TD Ameritrade must also be able to locate shares for you to borrow before you can short a stock. They do not allow shorting of OTC stocks (i.e. penny stocks).
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How Do I Place a Short Sell on TD Ameritrade?
Placing a short sell on TD Ameritrade is similar to how you would place a standard long trade, except you will select “Sell short” for the action. In the below example, you can see that we are looking to sell short 100 shares of AAPL with a limit price of $153.40 per share. This means we would like to sell 100 shares of AAPL for total proceeds of $15,340 or more.
How Do I Close My Short Position?
Let’s say TD Ameritrade filled my AAPL short order above, and that we expect tomorrow’s AAPL earnings report to be a disaster, bringing the share price down to at least $125. That’s where we would like to close my short position, locking in a gain of $28.40 per share, or $2,840 total. We would enter the below order details with an action type of “Buy to cover” in order to close, or “cover” my short position.
Can I Use the Proceeds from a Short Sale?
When you have an active short position, TD Ameritrade will show this as a negative market value in your account. You will not be able to use these funds, nor will you pay or earn interest on them, until the short position is closed.
What Does “Mark to Market” Mean?
TD Ameritrade will also mark to market your short positions at the end of each day, meaning that if the position moves against you (the stock price increases) your short balance will become more negative and your short position will reflect an unrealized loss. If this happens, you may be required to post additional cash to your account to cover the full short balance, as if you were forced to close it and buy back the shares at that day’s closing price.
On the other hand, if the short position moves in your favor (the stock price falls) your position will show an unrealized gain, however these funds won’t be available to you until you close the short and the gains are realized.
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