Can you Short Stocks on Questrade?
Can You Short Stocks on Questrade? You might probably be wondering how on earth could you short stocks on Questrade when you don’t even know what shorting stocks mean. Before we delve into how to short stocks or short sell on Questrade, let’s discuss its meaning and how it can be done.
What is Short Selling of Stocks?
Short selling is described as an act of disposing of a stock that does not belong to you on an exchange. This is usually arranged between you and your broker. Whereby the broker (in this case Questrade) lend you some shares when the price is high, and you decide to sell immediately while waiting for the share price to plummet. Once the price falls to a target level, you quickly buy the shares and return them to the broker. The remaining proceeds from the transaction, therefore, become yours after taking out margin interest fees and broker’s commission.
Why Do People Short Stocks?
People short sell merely to make more money but there are two primary reasons why many traders short sell. These are:
- To Speculate – Speculation is the number one reason why the majority of traders’ short stocks. Some traders dedicate a chunk of their time reading price chart data to find out which of the share prices is near falling. If all indicators support coming fall, they quickly borrow available shares and sell while the rate is still higher. Once the share price drops, the trader buys back the stock.
- For Hedging – This is a strategy used to protect an extended position whereby a trader decides to take advantage of perceived short-term downtown in the price of a share. Any gain made on the short selling is used to shield losses that may result from the extended position.
Risks Involved in Short Selling
No matter how interesting or straightforward short selling may sound, there are still some risk factors to consider. Some of them include:
- Possible Loss of Money – One crucial risk factor of a short sale is the possibility of losing hard earned money when speculations go wrong. For instance, if you borrowed 100 shares from your broker when the price per share was at $50, and you expected that the price would fall to say $40. But contrary to your expectation, the price took another twist by climbing to $60. From simple calculations, your minimum loss would be $1000.
- Short Squeeze – Following up from the first risk, it is highly probable that there were many traders in your shoes trying to cover their short positions all at the same time. The law of demand would take over, and it means one thing – continual increase in price. This may push you into a short squeeze.
- No Inventory – Your broker may as well let you down when you need the credit the most to win big to cover your losses.
Rules of Short Selling on Questrade
There are specific rules that you must abide with to be able to successfully short stocks on Questrade. Let’s quickly look at them:
- You Must Short Sell Through a Margin Account – It is a must that you use a margin account on Questrade to make short sell as this will enable them to monitor your account whether it can satisfy the minimum credit prerequisites.
- Compulsory Borrowing of Shares from Questrade – Of course, you can’t use borrowed shares from another platform to do short selling on Questrade. Although you do not have to pay interest on the borrowed shares on the platform, the interest payable ranges from 1% to 150% all depending on the difficulty of acquiring the shares.
- Borrowed Security Can be Recalled at any Time – Questrade is at liberty to request that you cover your short sell any moment.
How to Short Sell on Questrade
Note that before you can short stocks on Questrade, you must have opened a margin account on the platform. Once that is done, short selling becomes as easy as 123. To short sell, place an order to sell shares you don’t have already and follow through the necessary pop up messages. You must also know that the inventory of stocks that are available for short selling varies every day. The only means to identify you have a successful short is by placing a sell order on shares you do not own. If your trade goes through that shows that stock is available for shorting.