Shorting a stock means borrowing shares to sell them now, betting the price will drop so you can buy them back cheaper

When you short a stock on E*TRADE, you're selling shares you don't own, with the goal of buying them back at a lower price later. E*TRADE lends you the shares to sell immediately. If the price falls, you profit from the difference. If it rises, you lose money — potentially unlimited amounts, since stock prices can climb indefinitely. Shorting is riskier than buying stock outright, and E*TRADE has specific account requirements and procedures to set it up.

You cannot short stocks in a basic cash account. You need a margin account, which allows you to borrow money and securities from E*TRADE. Opening a margin account requires meeting E*TRADE's minimum deposit (typically $2,000, though this varies) and signing a margin agreement. Once approved, you can place short sale orders directly through the E*TRADE platform.

Key Takeaways

  • You must have a margin account with at least $2,000 to short stocks on E*TRADE; a regular cash account does not allow shorting.
  • E*TRADE charges interest on borrowed shares, and you must pay any dividends the stock issues while you hold the short position.
  • A short sale order is placed like a regular sell order, but you select "Sell Short" as the order type in the platform.
  • E*TRADE may recall borrowed shares at any time, forcing you to buy them back immediately, even if the price has risen.
  • Your losses on a short sale are theoretically unlimited, since a stock price can rise indefinitely.

Opening a Margin Account on E*TRADE

Start by logging into your E*TRADE account and navigating to Account Settings or Accounts. Look for the option to upgrade to a margin account. E*TRADE will ask you to review and sign a margin agreement, which outlines the terms: the interest rate you'll pay on borrowed funds, E*TRADE's right to liquidate positions if your account falls below maintenance requirements, and other borrowing rules.

You'll need to meet the minimum deposit requirement — usually $2,000 in cash or securities. Once you submit the margin agreement, E*TRADE typically approves it within one business day. After approval, your account will show a buying power figure that reflects both your cash and your ability to borrow on margin. This buying power is what you use to short stocks.

Placing a Short Sale Order

Open the Trade tab in E*TRADE and search for the stock you want to short. When you reach the order entry screen, you'll see a dropdown menu that normally shows "Buy" or "Sell." Click that dropdown and select "Sell Short." Enter the number of shares you want to short and set your price (market order, limit order, or stop order). Review the order details carefully — shorting the wrong number of shares or at the wrong price is an easy mistake to make.

E*TRADE will confirm that shares are available to borrow before the order executes. If shares are not available — because other traders have already borrowed the available float — your order will be rejected or placed on a waiting list. Once the order fills, E*TRADE has lent you the shares and deposited the sale proceeds into your account. You now owe E*TRADE those shares, and you must buy them back to close the position.

Interest, Dividends, and Borrowing Costs

While you hold a short position, E*TRADE charges you interest on the borrowed shares. The rate varies based on the stock and market conditions; less-liquid stocks often carry higher borrowing costs. You can see the current borrow rate for a specific stock by looking at the stock details page or contacting E*TRADE support.

If the company issues a dividend while you hold the short position, you must pay that dividend to E*TRADE — the opposite of what happens when you own stock. If the stock pays a $0.50 dividend and you're short 100 shares, you owe E*TRADE $50. These costs reduce your profit or increase your loss. Over months or years, borrowing costs and dividends can significantly erode returns on a short position.

Closing a Short Position

To close a short position, you buy back the shares you borrowed. Go to the Trade tab, search for the stock, and place a regular buy order for the same number of shares you shorted. Once the buy order fills, E*TRADE automatically returns the borrowed shares and credits your account with any profit (or debits it for any loss). The difference between your short sale price and your buy-back price, minus interest and dividends, is your net gain or loss.

You can close a short position at any time during market hours. There's no time limit on how long you can hold a short position, but E*TRADE can recall the borrowed shares at any time, forcing you to buy them back immediately. This happens rarely with liquid stocks but is more common with smaller or less-traded companies.

Margin Maintenance and Account Risk

When you short a stock, your account must maintain a minimum equity level called the maintenance requirement. E*TRADE typically requires you to keep at least 30% of your short position's value in cash or securities. If your account falls below this level — because the stock price rises and your loss grows — E*TRADE will issue a margin call. You must deposit cash or securities to bring your account back into compliance, usually within one business day.

If you don't meet a margin call, E*TRADE can liquidate positions in your account without your permission to raise the required cash. This means E*TRADE might buy back your short position at a loss, or sell other holdings you own, to restore your account to the maintenance level. Margin calls can force you to realize losses you weren't ready to take.

Restrictions and Special Situations

E*TRADE follows Regulation SHO, a Securities and Exchange Commission rule that restricts short sales. On stocks that have dropped 10% or more in a single day, you can only short on an uptick — meaning the last trade must have been at a higher price than the trade before it. This rule, called the uptick rule, prevents traders from piling into a falling stock and driving it down further.

Some stocks cannot be shorted at all on E*TRADE. Penny stocks (stocks under $5), newly issued stocks, and stocks with very low trading volume are often on E*TRADE's "hard to borrow" or "do not short" list. You'll see a message when you try to place a short order if the stock is restricted. Additionally, E*TRADE may suspend short selling on a stock temporarily if the company is in bankruptcy or if there's unusual market activity.

Frequently Asked Questions

What's the difference between a short sale and a short squeeze?

A short sale is the act of borrowing and selling shares. A short squeeze happens when a stock's price rises sharply, forcing short sellers to buy back shares quickly to limit losses. This sudden buying pressure can drive the price even higher, creating a feedback loop. You experience a short squeeze as a short seller when your losses mount rapidly and you face margin calls.

Can I short a stock in an IRA or retirement account?

No. IRAs, Roth IRAs, and most retirement accounts do not allow short selling. These accounts are designed for long-term investing. Only taxable brokerage accounts with margin approval can short stocks. If you try to place a short order in a retirement account, E*TRADE will reject it.

What happens if E*TRADE recalls the shares I borrowed?

E*TRADE will notify you that the shares are being recalled, usually giving you a few days to buy them back. If you don't buy them back voluntarily, E*TRADE will buy them back for you and charge your account for the cost. This forces you to close the position whether you want to or not, and you'll realize whatever loss or gain exists at that moment.

How much money do I need to short a stock?

You need at least $2,000 to open a margin account on E*TRADE. However, the amount you can short depends on your account's buying power, which is typically two times your cash balance (though this varies based on the stock and market conditions). If you have $5,000 in cash, you might have $10,000 in buying power, allowing you to short up to $10,000 worth of stock.

What if the stock I shorted gets delisted?

If a stock is delisted from major exchanges, you must still buy back the shares to close your position, but trading may become difficult or impossible. You could be forced to settle the position at whatever price is available in over-the-counter markets, which may be significantly higher than the last exchange price. This is a rare but serious risk of shorting small or distressed companies.