Shorting a stock on Fidelity requires a margin account and a borrow arrangement with the broker

To short a stock on Fidelity, you need a margin account — not a standard cash account. Fidelity must approve you for margin trading, which involves borrowing shares from their inventory or another source, selling them at the current price, and betting the price will fall so you can buy them back cheaper and return them. The process is straightforward once your account is set up, but the mechanics and costs are different from buying stock.

Shorting is not available in retirement accounts like IRAs or 401(k)s. It is also not available in standard brokerage accounts that hold only cash. You must have a margin account, and Fidelity will review your account history, net worth, and trading experience before approving margin. Once approved, you can place a short sale order directly through Fidelity's trading platform.

Key Takeaways

  • You must have a Fidelity margin account to short stock; standard cash accounts cannot short.
  • Fidelity must approve you for margin trading based on your account history and net worth.
  • You place a short sale order through the Fidelity platform by selecting "Sell Short" instead of "Sell" when you enter the order.
  • You pay interest on the borrowed shares and may owe a recall fee if Fidelity needs to return the shares to their owner.
  • Your short position remains open until you buy the shares back and return them, which can happen at any time.

Opening a margin account with Fidelity

If you have a cash account at Fidelity, you can request to convert it to a margin account or open a new margin account. Fidelity requires you to sign a margin agreement, which outlines the terms of borrowing and the risks involved. The agreement covers interest rates, maintenance requirements, and what happens if the stock price moves against you.

Fidelity typically requires a minimum of $2,000 in your account to open a margin account, though this can vary. Once your margin account is active, you can short stock immediately. There is no waiting period after approval.

How to place a short sale order on Fidelity

In Fidelity's trading platform, search for the stock you want to short. When you enter the order ticket, you will see an option to choose between "Buy," "Sell," and "Sell Short." Select "Sell Short." Enter the number of shares you want to short and the price at which you want to execute the order (or use market order for immediate execution at the current price).

Fidelity will check whether the shares are available to borrow. If they are not available, your order will be rejected or placed on a waiting list. Availability changes throughout the day as shares are borrowed and returned by other traders. Once your short sale executes, Fidelity holds the borrowed shares in your account and you owe them back.

Interest and fees on short positions

When you short a stock on Fidelity, you pay interest on the borrowed shares. The interest rate varies depending on the stock and how many shares are available to borrow. Stocks that are hard to borrow (because many traders want to short them) carry higher interest rates, sometimes 5 to 20 percent annually or more. Stocks that are easy to borrow may carry rates below 1 percent.

Fidelity deducts the interest from your account daily or monthly, depending on your account settings. You also owe any dividends paid on the stock while you hold the short position — you must pay the dividend to the person who owns the shares you borrowed. If Fidelity needs to recall the shares (because the lender wants them back), you may owe a recall fee on top of the interest.

Closing a short position and buying back shares

To close a short position, you buy back the shares you borrowed and return them to Fidelity. You do this by placing a regular "Buy" order for the same number of shares you shorted. Once the buy order executes, Fidelity automatically returns the shares and closes the short position. Your profit or loss is the difference between the price you sold short at and the price you bought back at, minus interest and fees.

You can close a short position at any time — there is no time limit on how long you can hold it. However, the longer you hold it, the more interest you pay. If the stock price rises significantly, your losses can exceed your initial investment, which is why shorting carries higher risk than buying stock.

Margin calls and maintenance requirements

When you short stock, Fidelity requires you to maintain a certain amount of equity in your account relative to the value of your short position. This is called the maintenance requirement. If your account value drops below this threshold — usually because the stock price rose and your short position lost value — Fidelity will issue a margin call.

A margin call means you must deposit cash or sell other holdings to bring your account back into compliance. If you do not meet the margin call within the timeframe Fidelity gives you (usually one business day), Fidelity can close your short position and any other positions without your permission to raise the cash. This is called a forced liquidation and can lock in large losses.

Restrictions and special situations

Fidelity follows Regulation SHO, a Securities and Exchange Commission rule that restricts short selling in certain situations. If a stock has a "threshold security" designation (meaning it has failed to settle many times), you may not be able to short it. Some stocks are also on a "hard to borrow" list, which means shares are scarce and interest rates are very high.

Short selling is also restricted on the first day a stock begins trading (IPO day) and during certain market conditions. Fidelity's platform will tell you if a stock cannot be shorted when you try to place the order.

Frequently Asked Questions

What is the minimum account balance to short on Fidelity?

Fidelity requires a minimum of $2,000 to open a margin account, though this can vary. Some short positions may require additional equity depending on the stock and the size of your position.

Can I short a stock in a retirement account?

No. Shorting is not permitted in IRAs, Roth IRAs, 401(k)s, or other retirement accounts. You can only short in a regular margin brokerage account.

What happens if I cannot afford to buy back the shares?

If your account falls below the maintenance requirement and you cannot deposit cash, Fidelity will force-liquidate your position to raise the cash. This locks in your loss and may result in additional fees.

How long can I hold a short position?

There is no time limit. You can hold a short position indefinitely as long as you maintain the required margin and pay the interest and dividends owed. However, Fidelity can recall the borrowed shares at any time if the lender requests them back.

Do I owe taxes on short sale profits?

Yes. Profits from short sales are taxable income. If you hold the short position for less than one year, the gain is taxed as short-term capital gains at your ordinary income tax rate. Consult a tax professional for your specific situation.