Shorting Stocks at Fidelity
If you’re tired of seeing your account value tank as the stock market drops, maybe it’s time to consider shorting instead of buying. With this little-known procedure, it’s possible to make money when prices go down.
Fidelity customers have the tools to do just that. With this article and your Fidelity brokerage account, you’ll be able to implement this professional-level trading strategy.
Overview of Shorting
The concept behind short selling of stocks or other investment vehicles is quite simple: you borrow an asset and then sell it. When the price goes down, you buy it back and return the asset to its original owner. Because you sold at a higher price than you bought, the trade makes money.
How to Sell Short on Fidelity
The first step is to find a stock or ETF (it’s not possible to short mutual funds) that is overvalued. You can do this using Fidelity’s stock or fund screener, found under the “News & Research” tab on the broker’s website.
Once you find a security that is set for a bear run, it’s time to short it. To do this, you’ll want to copy its ticker symbol and paste it into the broker’s free desktop platform Active Trader Pro (ATP). It’s also possible to run the website screener from inside ATP.
The regular order ticket is part of the platform’s default layout. But you’ll want to use the conditional trade ticket. To locate this, go to the “Trade & Orders” menu at the top of the platform and choose “Conditional Trade” from the drop-down choices. For the trade type, select OTOCO (one triggers order cancels other).
A new ticket will appear with three orders that need to be filled. The first one is the sell order. Enter the symbol and select “sell” for the action. If you see “sell short,” choose this option instead.
Enter the quantity and then select the order type. You can pick market or limit. The latter is a good way to guarantee yourself a minimum trade amount.
How to Buy to Cover
To exit the trade, you want to buy at a lower price than you sold at. But this is not always possible, and sometimes the trade moves against you by going up. If this happens, you want to buy to cover before the stock price goes too high. Otherwise, it could continue rising, leading to further losses.
To enter a protective order, you’ll create a buy stop order. With Fidelity’s conditional trade ticket, you can enter it at the same time as the sell order. You’ll want to select buy as the action and stop as the order type.
The stop price should be higher than the market or limit price where you plan to enter the trade. If the price goes up and hits the stop price, a market order will be executed, which will take you out of the trade and prevent a large loss.
The second buy-side order you’ll want to enter is the buy limit order. This creates a winning trade when the price comes down to the limit price you specify. If one buy order executes, the other will be automatically cancelled.
It’s also possible to enter the buy orders later if you want to monitor the price action manually.
Fidelity Shorting Requirements
To short any security at Fidelity, you’ll have to have 2 grand in your account at a minimum. It must also be a margin account. You can’t short anything inside a cash account. Why? Because when you short something, you have to borrow it first. And borrowing requires a margin account.
The Cost of Shorting
Like many other brokerage firms, Fidelity succumbed to the price war in the industry. It now offers $0 commissions, and this fantastic rate applies to short orders. Short positions can be subject to interest charges, however. Fidelity tells us that it does charge an interest rate on hard-to-borrow shares. The exact rate can change based on a variety of factors.
For short selling a great alternative broker is Firstrade. It has a number of advantages over Fidelity: $0 commissions on options trades, better margin rates, and easier to learn trading tools. Learn more...
Fidelity’s maintenance requirement for most short positions is 35%. Some equities may be higher than this. The broker does have a margin calculator on its site that displays the exact requirements for a particular security. Initial margin is 50%.
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