Can anyone please recommend a comprehensive tutorial on how short-selling stocks works? What does the process involve? Is Short-selling instantaneous or is there some sort of waiting period? Is it feasable for a day-trader to rely on a short-selling strategy? How does a stock-locate work and can I use services such as locatestocks.com in conjunction with my broker (IB) What does the "shortable stock list" mean?
Long and short are the same as far as the mechanics of entering/exiting trades is concerned. IB locates shares for shorting. They have a column on the TWS that shows a color for short availability. red = can't short, dark green=hard to short, bright green = shortable. Remember that when you're shorting, you're borrowing someone else's shares and selling them. Your broker has to locate shares to do this and it's all automated. Until the uptick rule is reinstated, you can just bang on the bid and get filled.
As far as you're concerned, it's just buying/selling in reverse. There is no waiting period. When you short-sell, you're technically <i>borrowing</i> the shares first, and then selling them on the market. When you cover your short, you're buying the shares back to give back to the borrower. In actuality, your broker takes the responsibility of borrowing the shares for you, and it's all instantaneous; as far as you're concerned, it's no different than a normal long position, just that it's in reverse. Your broker borrows the shares, or you 'borrow' them from the broker's own stash; when you cover, you're buying the shares back for your broker. There's no waiting period, and no extra work to be done by you. All you have to worry about is whether or not the shares are shortable, according to your broker; that's your broker's business though, and obviously they won't let you short-sell shares that aren't on their shortable list. Shares may be considered un-shortable, for example, if your broker doesn't have them available and doesn't feel like borrowing them. The up-tick rule (which used to be in effect, and may be again) simply means that you can't short-sell a stock unless its last movement was an up-tick. Which means that you have to wait for the next up-tick for your short to actually be executed. Which means simply that your trade may (or may not) take a few extra seconds to execute, if and/or when they reinstate the up-tick rule. Is short-selling a viable strategy for a day-trader? Of course. Almost every day trader in the world does both long and short positions, routinely, depending on market conditions. I haven't ever specifically met a day trader who only trades long positions. I'm sure they do exist, but the overwhelming majority go both ways when it comes to that. I'm sure you could use services such as locatestocks.com if you wanted to, in addition to IB's services, but I don't see why it would be necessary. Did that answer all of your questions about shorting?
you have just unlocked the key to millions-short selling. congratulations on your new found success and now go make those millions. It will be very easy to print cash now. im happy for you. another one joins the big boys in short selling.
I understand all of this so far. I am trying to set up a strategy that involves some short-selling. However I see that IB has way too few stocks in their shortable list. If IB is my broker, am I limited to their shortable list or can I use third-party service that locates the stocks for me so I can then execute the order through IB?
hahaha that's funny congoboy just keep making fun of the new guys. I'm not daydreaming about millions through shorts. I'ts just a strategy to break-even on some trades for me. but I'll let you know if i do make those millions.
stevegee58: what is a sound way of thinking about this. please enlighten me. How can day-traders even consider short selling as a feasable strategy if they are so limited by their brokers shortable list?
OK then explain this to me. Why does IB need to locate the shares to allow you to short a stock when they are really only supposed to be a trade FACILITATOR. What I mean is that if theres 700 shares sitting there on the bid and I want to execute a short against them then why do they need to locate them? Whoever is SITTING THERE ON THE BID is who has the shares I wish to short. IB doesnt need to locate them. They are clearly being offered for sale by someone in the ether. There is simply no way you can then turn around and say ... Oh well sure there 700 shares being offered but you cant have them because technically they dont exist. Its simple : I hit the bid and the counterparty ie whoever wishes to buy at that price assumes the other side of the risk equation. If the stock then gos down 5 cents I show a 5 cent gain and whoever wished to buy at that price shows a 5 cent loss. Thus the equation is perfectly balanced. Now you tell me the flaw in my thinking.
thanks for your explanations theboxer. maybe my logic about this isnt accurate. please correct me if i'm wrong. Why wouldn't be necessary to use a third-party locator service if the broker only has a relatively small number of shortable stocks? and even a less number of the the stocks that I actually NEED to short? In your experience, is the IB list good enough to rely a strategy on it?