How to Short Sell on Robinhood? Best Way to Short Stocks?

Trading concepts

Short Sell Robinhood

Do you want to know how to short sell on Robinhood? Then you aren’t alone. You might find a lot of people asking about how to short stocks on Robinhood, especially when you are in the community of traders. Therefore, we decided to help you and others interested in knowing the answer to that question. 

Our today’s guide on how to short sell on Robinhood is a detailed one. We are going to cover everything you need to know including an introduction to Robinhood and short selling. Moreover, our guide contains detailed guidance on how to short stocks on Robinhood. Let’s start immediately. 

Introduction to Robinhood

Your enthusiasm to know how to short stocks on Robinhood indicates you must have heard about Robinhood. It is a trading platform that first introduced commission-free trading. Robinhood mobile application is also among the best mobile trading applications. Moreover, the broker also allows penny stocks trading and trading in a fraction of a share. These were the innovative offerings that led Robinhood to secure more than 18 million users since its inception in 2013. 

Robinhood is the broker that also made the most out of the outbreak of the COVID-19 pandemic. The substantial rise in the number of traders across the globe during the pandemic benefited the broker. Moreover, the cryptocurrency boom in the latter half of the last decade also proved instrumental in Robinhood’s success. 

Robinhood is extremely popular among traders in general and first-time traders in particular. Newcomers take a huge interest in Robinhood’s mobile trading application because of a few obvious reasons. Firstly, it is a commission-free trading platform where traders don’t have to pay brokerage commissions. Secondly, the mobile application offers interesting and enticing features such as a game-like and user-friendly interface, captivating animations, push notifications, and much more.

If you want to trade using a mobile application by Robinhood, the procedure is pretty simple. There are no significant requirements to open an account with the broker. You just have to be of at least 18 years old, have a Social Security number, a US address, and of course money to trade with. However, before choosing a platform, you must determine your motivation first. That is important for your success in your trading endeavor. 

Introduction to short selling stocks

Knowing the basics of short selling stocks is important prior to knowing how to short stocks on Robinhood. Short selling is a highly popular trading strategy. It involves taking profit through short positions. Short positions are inverse of long positions. Long positions involve buying a financial asset at a low price and then selling high. That means long positions involve taking profit from stocks when their value increases. Whereas, a short position involves making profits when stocks lose value.

Now, where do you get stocks to short sell? Actually, short-selling stocks involve borrowing stocks and selling them at the current price. Later on, when the stocks lose value or their price declines, you buy them again and return them to the broker. That means the difference between the proceeds from selling stocks initially and the cost of buying them back is your gain. However, the strategy isn’t that much simple as it initially seems. You have to be spot-on in your price predictions. You only make a profit when your forecast turns out to be correct. The stock price moves in your favor and book profit for you. Conversely, you may incur significant losses if the price doesn’t move in your favor. 

Costs of short selling stocks

You have to bear the costs of short selling just like you do for any other trading strategy. Brokers are offering numerous services just to make money. Therefore, you can’t expect that there are no costs associated with short-selling. 

Firstly, borrowing stocks for short selling also costs you a lot of money. There are standard borrowing costs that may vary from broker to broker. Additionally, the broker may charge additional fees on top of standard fees if your desired stocks are hard to acquire and borrow. In short, costs of short selling vary and they depend on the broker and stocks to be borrowed. 

Moreover, if you are using a margin account, borrowed cash also has its own costs. You may have to bear interests and fees. On top of that, you may have to reimburse the dividend amount or stock split if the dividend or stock split is announced in the meanwhile. So, there are multiple factors you have to consider when looking to short-sell stocks. 

How to short sell stocks?

Short-selling stocks require you to have a margin account with your broker. However, it depends on regulations on how much minimum deposit amounts you need to have a margin account. Moreover, some brokers also require a higher minimum deposit than the amount required by regulators. Once you are done with a margin account and minimum deposit, the following steps lead you to start short-selling stocks.

1. Firstly, you need to conduct technical analysis and research to analyze the market. Once you are done with analysis and determine an overvalued stock, you are good to go.

2. Secondly, you borrow a particular number of shares from a broker after agreeing to a brokerage contract. Now, you can open a short position and short sell stocks because you are certain about the upcoming decline in the price of that stock.

3. Thirdly, you sell borrowed stocks at the stock market when prices are high.

4. Fourthly, you begin to closely observe the market. This is in fact a period to wait for prices to decline. This period is known as the incubation period. When the price drops to your desired level, buy stocks back and return to the broker. However, if prices do not decline and your prediction turns out to be incorrect, you can cut losses short. In this case, you have to buy stocks back.

5. Finally, you can calculate your gains or losses by subtracting your total costs from short sell proceeds. 

How to short sell on Robinhood? 

Now, we are assured that you are prepared to better understand how to short stocks on Robinhood. As we have already discussed, you need a broker to short stocks, it can be Robinhood. So, if your chosen broker is Robinhood, and you want a direct approach to short stocks as per short selling definition, then you cannot do that at Robinhood. Why so? Let’s see!

Selling stocks short is the simple, straightforward, and direct approach to shorting stocks. In this approach, you simply borrow stocks from your broker and open a short position to sell these shares. When the price falls to your desired level, you buy back stocks and return them to your broker. Robinhood, unfortunately, doesn’t allow this type of approach to short selling. 

Moreover, you have different ways in your proposal to short stocks and all of them have their own advantages/disadvantages. Which of those ways does Robinhood support? This is the main talking point when you are after knowing how to short sell on Robinhood. 

Robinhood supports two ways of shorting stocks – Inverse ETFs and put options. Let’s discuss how you can use each of them on Robinhood and make a profit from short selling. 

1. Inverse ETFs

Inverse ETFs also offer an easier way to short stocks on Robinhood. This approach involves entering a short position through inverse ETFs. Whereas, inverse ETFs are created to gain from falling values of the underlying benchmarks. When you invest in inverse ETFs, you actually look to hold short positions. Luckily, shorting using inverse ETFs does not require you to have a margin account on Robinhood. 

Furthermore, there are different types of inverse ETFs to take advantage of. You can use ETFs like Nasdaq 100 or Russell 2000 to capitalize on declining broader market indexes. There are also inverse ETFs that are specifically related to a particular sector such as energies, financials, etc. In short, inverse ETFs are the best tools for short sellers to short sell on Robinhood. 

2. Put options

You can also use put options to short sell stocks on Robinhood. Put options are time-sensitive financial instruments. When you buy put options, you have the right to sell a particular number of shares of the underlying security at a predefined price. That predetermined price is known as the strike price. Moreover, as put options are time-sensitive financial instruments, you have to sell stocks before a predefined date in the future.

Again, put options also seem pretty simple and easy to trade and make a profit. However, it isn’t that simple either. Firstly, you have to be spot on about your price prediction regarding a particular stock. Secondly, you need to determine how much the price will drop? Thirdly, you also need to predict the time period in which the price of a stock will drop. All these factors are important and determine your profit or loss. Therefore, put options is a short-selling strategy that isn’t a suitable one for new investors. 

Steps to short sell put options on Robinhood

If you want to use put options to short sell using Robinhood, you have to follow the following steps.

1. Step one is to choose stock after careful consideration. Choose stock after detailed analysis and once you are sure the price of that stock will decline. Additionally, also try to predict how much price will fall and in how much time. These factors are crucial to maximize your gains and prevent losses.

2. Step two is to select the screen of the stock you want to buy put options on. Now, click on the “Trade” button. A pop-up button will appear saying “Trade Options”. Click that button and the platform will take you to a new screen with all the available put options.

3. Now select the maturity date from the given options. Afterward, select “Buy” and “Put” to choose the trade you want to make. All the available put options for the selected maturity date will appear on the screen now. You will also see their strike price and last price. Additionally, the current break-even price will also be there for each contract. This price is a good indicator because it specifies the minimum price level to which your chosen stock must fall to cover the premium you pay for the contract. 

4. After selecting the particular put options contract for short selling, you need to select the number of put options contracts you want to buy and the maximum price you are ready to pay. It is important to note that 100 shares are included in one contract. Now, Robinhood will show you the cost of the trade. After carefully reviewing the trade for the last time, you can submit it.

How to short sell on Robinhood? The wrap-up

Robinhood is among the most popular trading platforms among traders, especially newcomers. There are multiple reasons for such popularity. The broker offers commission-free trading and an engaging mobile application. 

How to short stocks on Robinhood? It is a question you often find traders asking. There are several factors you need to consider when it comes to short selling. Firstly, you need to choose a broker and then factors like costs and trading fees.

If you choose Robinhood for shorting stocks, you need to know that Robinhood isn’t a top-notch choice when it comes to short-selling stocks. Why is Robinhood not a good choice when short-selling stocks? Because the broker doesn’t allow you to short stocks directly. That means you cannot borrow stocks from Robinhood for a particular period of time for short selling. Instead, you have to choose between inverse ETFs or put options. Inverse ETFs involve gaining from falling values of the underlying benchmarks. Whereas, put options involve buying put options contracts for short selling. 

In short, Robinhood is among the top and most popular brokers. However, when it comes to shorting stocks, it doesn’t allow you to short sell stocks directly. Rather it requires you to choose from inverse ETFs or put options contracts. You may choose whichever option you like but don’t forget to understand the associated risks. There is nothing risk-free in the world of trading. 

Russell Crane

Russell Crane

Russell is an Algorithmic & Technical Analyst Trader @ PatternsWizard.
His passion is to share his knowledge about TA, patterns & more. Why hope for your trading to work when you can precisely know the performance stat of every pattern?

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