Shorting a stock on E*TRADE means borrowing shares, selling them at today's price, and hoping to buy them back cheaper later

To short a stock on E*TRADE, you need a margin account (not a cash account), sufficient buying power to cover the short sale, and access to shares available to borrow. The basic steps are: search for the stock, select "Sell Short" instead of "Sell," enter your order details, and submit. E*TRADE will locate and borrow the shares on your behalf, deposit the sale proceeds into your account, and charge you interest on the borrowed shares until you close the position by buying them back.

Shorting is riskier than buying stock because your potential loss is theoretically unlimited — if a stock rises to $500, you still owe 100 shares at that price, no matter how high it goes. You also pay interest on the borrowed shares, may face forced buybacks if shares become hard to borrow, and owe any dividends paid while you hold the short position. Most E*TRADE accounts can short, but the broker restricts certain stocks (usually penny stocks and very new IPOs) and requires you to have a margin account with at least $2,000 in equity.

Key Takeaways

  • You must have a margin account with E*TRADE, not a standard cash account, to short any stock.
  • E*TRADE charges interest on borrowed shares, and that cost increases the longer you hold the short position.
  • If the stock you want to short is hard to borrow, E*TRADE may not have shares available, or the interest rate may be very high.
  • A short position can lose money indefinitely if the stock price rises, so most traders use stop-loss orders to limit losses.
  • You owe any dividends paid on the stock while you hold the short, which reduces your profit or increases your loss.

Setting up a margin account on E*TRADE

A margin account allows you to borrow money or securities from E*TRADE to trade. A standard cash account does not. To short, you must convert your account or open a new margin account. If you already have an E*TRADE account, log in, go to Account, then Account Settings, and look for the option to upgrade to margin. E*TRADE will ask you to agree to the margin agreement and confirm you understand the risks.

E*TRADE requires a minimum of $2,000 in account equity to open or maintain a margin account. This is a regulatory requirement, not E*TRADE's choice. Once approved, you can short stocks immediately, but your buying power for short sales depends on your account balance and the stock's price. A $10,000 account might give you $20,000 in buying power (2:1 leverage), but E*TRADE adjusts this based on market conditions and the volatility of the stocks you trade.

How to place a short sale order

Open E*TRADE's trading platform (either the web version or the mobile app). Search for the stock you want to short by ticker symbol. Click on the stock to open its detail page, then click "Trade" or the order entry button. In the order form, you will see a dropdown that says "Buy" or "Sell" — change this to "Sell Short."

Enter the number of shares you want to short, choose your order type (market order executes immediately at the current price; limit order executes only at a price you specify or better), and set your time frame (day order expires at market close; good-till-canceled stays open until you cancel it or it fills). Review the order summary, which will show you the estimated proceeds and any fees, then click "Preview Order" and "Submit." E*TRADE will confirm the short sale once it fills.

Not all stocks can be shorted. E*TRADE blocks short sales on penny stocks, stocks under $5 (in some cases), stocks with very low trading volume, and newly listed companies. If you try to short a restricted stock, the order entry form will show an error message. You can also check E*TRADE's short list before placing an order by contacting their support line or checking the stock's detail page.

Understanding borrow rates and availability

When you short a stock, E*TRADE borrows shares from its inventory or from other sources and lends them to you. You pay interest on those borrowed shares, called the borrow rate or short rebate rate. The rate varies by stock and changes daily based on how hard the stock is to borrow. Stocks that are easy to borrow (like large-cap companies) might cost 0.5% to 2% per year. Stocks that are hard to borrow (like heavily shorted small-cap stocks) can cost 10%, 50%, or even higher.

E*TRADE shows you the current borrow rate before you place the order, so you can see the cost upfront. The interest accrues daily and is deducted from your account. If you short 100 shares of a $50 stock at a 5% annual borrow rate, you owe about $250 per year, or roughly $0.68 per day. Over a few weeks, that is manageable; over months, it adds up.

Sometimes E*TRADE cannot locate shares to borrow, even if the stock is not on the restricted list. This happens when demand to short is very high and few shares are available. In that case, you will see a message saying shares are not available. You can place a "locate request" and wait, or try again later. If shares become unavailable after you have already shorted them, E*TRADE may force you to buy back the shares (called a "buy-in") with little notice, which can lock in a loss.

Closing a short position and calculating profit or loss

To close a short position, you buy back the shares you borrowed. Log into E*TRADE, find the stock in your positions list, and click "Trade." This time, select "Buy to Cover" instead of "Buy." Enter the number of shares, choose your order type, and submit. Once the order fills, your short position is closed and the borrowed shares are returned to E*TRADE's inventory.

Your profit or loss is the difference between the price you sold short and the price you bought back, minus the interest you paid and any commissions. If you shorted 100 shares at $50 and bought back at $40, you made $1,000 before costs. If you paid $200 in interest and $10 in commissions, your net profit is $790. If the stock rose to $60, you lost $1,000 before costs, and after interest and commissions, your loss is $1,210.

You also owe any dividends paid on the stock while you held the short. If you shorted a stock that paid a $0.50 dividend per share, you owe $50 on a 100-share short. This is automatically deducted from your account on the dividend date. This is one reason traders avoid shorting dividend-paying stocks unless they plan to close the position before the ex-dividend date.

Using stop-loss orders to limit losses on shorts

Because short losses are theoretically unlimited, most traders place a stop-loss order to automatically buy back shares if the stock rises to a certain price. For example, if you short a stock at $50, you might set a stop-loss at $55. If the stock hits $55, E*TRADE automatically buys back your shares at or near that price, capping your loss at roughly $500 (plus interest and fees).

On E*TRADE, you can add a stop-loss when you place the short order or add it later. Go to your positions, find the short stock, click the menu, and select "Add Alert" or "Set Stop Loss." Enter the stop price (the price at which you want to buy back) and choose whether you want a stop-market order (executes at market price once triggered) or a stop-limit order (executes only at your limit price or better). Stop-market orders are more likely to fill but may execute at a worse price than you expected. Stop-limit orders give you price control but may not fill if the stock gaps past your limit.

Margin calls and forced buybacks

If your short position loses money, your account equity shrinks. E*TRADE monitors your account and requires you to maintain a minimum equity level, usually 30% of the value of your short position (this is a regulatory requirement). If your equity falls below that threshold, E*TRADE will issue a margin call and ask you to deposit cash or close positions to bring your account back into compliance.

If you do not respond to a margin call within a few business days, E*TRADE can force you to buy back your short positions without your permission. This is called a forced buyback or liquidation. You will be forced to buy back at whatever price the stock is trading at, which could be significantly higher than when you shorted it. E*TRADE will notify you by email and phone before this happens, but the notification may come during market hours when you cannot respond immediately.

To avoid margin calls, monitor your account equity daily, especially if you hold large short positions or if the stock is rising. If your equity is getting close to the minimum, close some positions or deposit cash. Many traders set alerts in E*TRADE to notify them if their equity falls below a certain level.

Frequently Asked Questions

Can I short a stock on E*TRADE with a cash account?

No. You must have a margin account to short any stock. A cash account only allows you to buy and sell stocks you own. If you have a cash account, you can upgrade to margin by logging into your account settings and following the prompts. E*TRADE requires a minimum of $2,000 in equity to maintain margin.

What happens if the stock I shorted pays a dividend?

You owe the dividend amount to E*TRADE on the ex-dividend date. If you shorted 100 shares of a stock that pays a $1 dividend, you owe $100. This is deducted from your account automatically. To avoid this, close your short position before the ex-dividend date, or factor the dividend cost into your profit target.

Can E*TRADE force me to buy back my short position?

Yes, if your account equity falls below the regulatory minimum (usually 30% of your short position's value) and you do not deposit cash or close positions, E*TRADE will force a buyback. E*TRADE will notify you first, but if you do not respond, they can liquidate your position at market price without your permission.

How much does it cost to short a stock on E*TRADE?

The main cost is the borrow rate, which varies by stock and ranges from 0.5% to 50% or higher per year. E*TRADE shows you the current rate before you place the order. You also pay any commissions (E*TRADE charges no commission on stock trades) and owe any dividends paid while you hold the short.

What is the difference between a stop-market and stop-limit order for closing a short?

A stop-market order buys back your shares at market price once the stock hits your stop price, guaranteeing execution but not price. A stop-limit order only executes if the stock reaches your limit price or better, giving you price control but risking no execution if the stock gaps past your limit. For shorts, stop-market is usually safer because it ensures you close the position if the stock rises unexpectedly.