Short selling is a popular strategy for more advanced traders to increase profits when a stock decreases in value. Though inherently risky, short selling has increased in popularity due to the democratization of equity investing. Apps like Robinhood and Webull have led the charge to put the power of the stock market into the hands of the average consumer.
This article is dedicated to explaining in detail the steps for shorting a stock on Webull. While short selling is an exciting topic, it is important to do sufficient research before taking the leap.
Of the many investing apps in the app store, Webull stands out from the crowd as a great place for intermediate investors to put their money. Webull is a commission-free trading app designed to give investors all the tools they need to be successful.
Unlike many free investing apps, Webull has advanced research tools and data to help its users make informed decisions. This is one of the many reasons that investors choose to short sell with Webull.
In order to short a stock on Webull, like with all investment instruments, a margin account is required. A margin account is built within your brokerage account and allows you to borrow money against your investments.
With Webull, you will need to have at least $2,000 in net account value. This number will fluctuate from time to time but you will be unable to borrow using a margin account without at least $2,000 of assets.
From that point on, taking a short position, or short selling on Webull, is relatively simple and can be accomplished in just ten quick steps.
Once the stock has fallen to the desired amount, you must then purchase the number of shares of that stock that you owe. This action closes out your position and you will see profits immediately appear in your account.
If your stock has not fallen to the price that you were expecting you will receive a margin call. This simple term spells out the danger to your capital. This means that you must transfer more money into your margin account to make up for lost profits. If you fail to remedy a margin call, your position may be closed out and you could face potential penalties.
From Webull's website, the cost associated with a short sale is simply the fee for borrowing the stocks of the target company.
This can be calculated using the following formula: Daily Margin Interest (Short Position) = The Daily Market Value of the Borrowed Stocks when Market Closes* Stock Loan Rate for That Stock/360.
In addition, Webull provides up to 4x day-trade buying power and 2x overnight buying power with a margin account. The margin rate is variable and on a sliding scale depending on the margin loan. This rate ranges from 6.99% per annum to 3.99% per annum.
Short selling, in its simplest form, happens when an investor borrows a stock, sells it, and then purchases the stock at a lower price and returns it to the original owner.
Investors will utilize this form of trading when they believe that a stock is overvalued and expect it to decline in price. This method of investing is riskier than long-term investing or swing trading because, in theory, there is no limit to the amount you could lose.
Before jumping in with both feet and risking a potentially large sum of money, there are some research steps you should take. Most speculative investors use two different research methods before entering into a short position.
This type of analysis measures the value of a share of a company’s stock as determined by the company and the characteristics of its industry. This type of research includes looking at everything from financial statements to the management personnel of the company. It also takes into account the health of the company’s industry and the economy as a whole.
This form of research uses, at its core, a pattern of the asset’s price changes. You’ve probably seen a candlestick chart on your trading apps. This is an example of tracking price changes to complete technical analysis.
Let's see this play out in a fictional example that is meant to illustrate the potential earnings of a short position. As a reminder, investors make money when the price of the stock decreases but will lose money if their research and intuition is incorrect and the stock price increases in value. As mentioned before, this could be worth a huge amount of money.
John believes that clean energy regulations will have a negative impact on the oil and gas industry. After performing sufficient research, John decides to take a short position in Chevron.
In this example, shares are currently trading at $100 so he borrows 100 shares and sells them to another investor. When the stock drops to $75, John purchases 100 shares and returns them to the original owner.
In this scenario, John’s profit, excluding commissions and interest on the margin account, is $2,500: ($100 - $75= $25. $25 x 100 shares = $2,500).
Short selling, when successful, can net the investor a nice profit in the short term.
While short selling is inherently risky, it can often be used to hedge other investments and make money during a bear market. Don’t let the fear of losing money keep you from taking smart short positions that have great potential to make you profit. Simply do adequate research and be sure that you have reserves built up should a margin call come knocking.
If you are looking to begin short selling, Webull is a great first choice. This app provides substantial research tools, a relatively simple platform, and 24/7 online support.