How to Borrow a Stock

How to Borrow a Stock for Shorting

Do you know how to borrow a stock? You’re probably familiar with buying and selling stocks. You might even be dabbling already with your modest $1,000 trading account.

  1. Here’s how to borrow a stock:
  2. Choose a good short-selling broker like SpeedTrader or Interactive Brokers
  3. Make sure they have good short locations
  4. Sell the ask/bid or place a limit order to create a negative short position
  5. Buy the ask/bid or place a limit order and cover your position

What if I told you there’s another way instead of buying and selling? What if I told you that you could borrow a stock? Yes, I mean borrow. Like borrowing and giving back.

Pro investors have learned how to borrow a stock, make money, and then return with a small fee. Today, I will show you how you can do what the pros do. But remember, the trading arena is open to everyone, not just the pros.

To make this easy to understand, borrowing is like renting. So, instead of buying the $250,000 high-performance car, you can get your fix by renting it for the afternoon. What’s great about it is that you’re not paying for the $1,000 oil changes and $2,000 tires. Which, for reference, needs to be changed more often than diapers on a newborn.

All of this sounds risky to me, which is why borrowing might be the safer bet. Our trading service goes both long and short with stocks and options. It gives you different ways to trade the market.

Waits for Prices to Fall

People invest in stocks with the hope of making money. They aim to ride the profit train on the tails of a company’s positive news and soaring profits.

But did you know there’s a whole other class of traders, called short sellers, who do the opposite? The complete opposite.

Short sellers are looking for companies that are tanking due to negative news; think news stories about people dying due to using the company’s product.

I know, I know, that may be an extreme example, but you get my point. Their goal is to cash in on the falling stock prices that are surely about to happen.

Stock trading is great when you have strategies to make money in any market. First, however, you must ensure you’re safe with it.

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What Does Borrowing a Stock Mean?

You’ve done your research and would like to take a short position. But, unfortunately, people dying typically will hurt the share price. So, you go to your broker and borrow the shares.

You have no idea where the shares come from or to whom they belong, but that doesn’t matter. They may come from another trader’s margin account, out of the shares held in the broker’s inventory, or even from another brokerage firm.

Remember that the broker is the lending party once you place the order. The individual investor is not doing the lending.

In other words, the broker assumes any benefits along with any risk. Take our online trading courses to learn how to borrow a stock.

Renting Your Shares

Money. It always boils down to money. And that’s what your broker will get. Firstly in the form of interest from lending the shares and secondly in the commission paid by you to use their service.

And why would you have to pay a commission? Because they are taking on the (your) risk. Think about it like this: what if you, as the short seller, filed for bankruptcy and can’t return the shares you borrowed?

Unfortunately for the broker, they must return the shares to the lender. And it’s because of this risk you need to pay to play. However, you can take our stock trading course if you’re new and want to get a handle on things. Or as a refresher for anyone who’s a pro at trading.

How Much Does It Cost to Borrow a Stock?

  1. Here’s what it costs to borrow a stock:
  2. Choose the number of shares that you want to short
  3. Multiply the number of shares by the price of the stock
  4. This will be the cost of your negative position
  5. Then, you would add broker commission fees.

Lender Wants to Sell

As the renter or short seller, typically nothing. Typically, the broker that loaned the shares to the short seller will replace the shares from its existing inventory.

The shares are sold, and the lender pockets the proceeds. The short seller is now responsible for returning the shares to the brokerage firm.

All that changes is who the short-seller is returning the shares to. We talk about short selling in our trade room. Make sure to check us out.

How to Borrow a Stock in TOS

This is an example of how to borrow a stock in the ThinkorSwim platform.

Example on How to Borrow a Stock

Say company CAR, an automobile parts manufacturer, is trading for $40 a share, which is way too high in your opinion. Plus, the bad news is circulating that a faulty sensor was the cause of fatal crashes on the highway.

You sense an opportunity here and contact your broker. Luckily, you have a great broker, and they can immediately find 100 shares from another investor and let you borrow them. You quickly sell the shares and pocket the $4,000 from the sale.

Two weeks later, the company confirmed the crashes were due to a defect, and the stock plummeted to $25 a share. And what do you do?

You buy 100 shares of CAR for $2500 and give the shares back to the brokerage you borrowed from. Do the math, and you pocket a nice $1,500 profit. It’s not a bad return if you ask me.

What Is a Hard to Borrow Stock?

A hard-to-borrow stock is a list of stocks that brokerage firms use to locate stocks that are challenging to borrow for short selling. This list is always updated; some brokerage firms have better locates than others. Some brokers also show easy-to-borrow stocks as well.

How to Borrow a Stock

Beware of Hidden Fees

It’s a given in life; there are always hidden fees. Even if they say no hidden fees exist, they’re somewhere else. 

That said, let’s talk about the fees you have to pay to play. First are the interest and commission to borrow the stock your brokerage charges.

Second is the dividend you must pay. If the company pays out a dividend between when you borrowed and returned the stock, it’s on you to pay it.

Even if you have already sold the stock, please know the dividend payout calendar. We offer a list of penny stocks with long and short plays.

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Choosing a Broker

Choosing the right broker or dealer to work with is essential. Brokers help you to search for the best stocks in the market for short selling.

They also help you to look for sellers who are ready for short-trading. Searching for such owners and still making a profit would require a lot of time and resources.

Always remember you have a tiny window open for buying, selling, and making money. Many brokers are in the market, but you must choose the best.

Your experience when borrowing stocks will depend on the skills of the dealer you have identified. You can choose an experienced dealer who understands the market and proactively guides you through the processes.

Brokers charge for their work on commission. You need to choose a dealer who will give you the best rates.

Timing on How to Short Stock

Short selling is a matter of timing, and you must make a substantial amount that gives you returns and helps you pay the broker.

You might also want to consider a dealer who allows you to pay once you have made a profitable sale. Such a broker or dealer is confident that his insight was helpful.

Approach a dealer who asks for upfront payment with caution. This form of trading is a bit risky and may even lead to a loss.

While the dealer is offering professional services, there should be an assurance that the advice given will make your borrowing profitable.

There is no such assurance if a payment needs to be made in advance. However, it is not apparent that a broker who allows you to pay later offers quality and reliable services.

Do Your Research Wisely

Learn about the market and trading trends. You must know the stocks you target when to buy, how to make money and the perfect time to sell. 

It will be risky to engage in any trading without understanding the market. Learn important terms like shorting, covering, and margin, among others.

They make it easy to acquire and sell off stocks at a profit. Prepare for the benefits you stand to reap and the losses you are likely to encounter.

If you conduct thorough research and make a move at the right time, borrowing a stock can be extremely rewarding. However, there is also an opportunity to make huge losses beyond what you can imagine.

Research also points to the number of stocks you can take to reap the rewards you anticipate.

The company’s performance in the stock market will give you the green light to deal with or avoid it. This information tells you what other investors think about a particular company.

If many investors are looking to sell short, you know that they expect these stocks’ prices to fall or rise.

If there are more investors interested in a particular stock, there are chances that it will be volatile. This will be good or bad news, depending on your approach to risk.

Final Thoughts: How to Borrow a Stock

If you are entering the market for the first time, you need to take it slow. Invest only when you are sure that you will make a reasonable amount.

Though trading is full of risks, you must not risk everything you own. Only risk as much as you are willing to lose when trading.

Be patient enough to learn the tricks that work when borrowing stocks and those that will cause losses. It will get easier and more profitable over time.

Frequently Asked Questions

Stock lending offers shareholders a low-risk opportunity to earn money on the stocks they already own.

The main purpose of loaning stocks is to earn income. Shareholders earn interest daily on shares they loan out.

  1. Contact your broker. You need to see if they have shares of the stock you want to bet against. Your broker will then find an investor who owns the shares and is willing to loan them to the brokerage firm, with a fee for the so-called “renting” of their shares. Unfortunately for you, you’ll have to foot this bill.
  2. Immediately sell the shares you borrow on the market. At this point, you will have cash in your pocket due to the sale.
  3. Wait. Wait for the stock price to plummet and then repurchase the shares at the new, cheaper price.
  4. You return what you borrowed. The shares return to the brokerage you borrowed them from, and you pocket the difference.

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