How to Short a Stock on Robinhood

How to Short Sell a Stock on Robinhood

10 min read

Do you know how to short a stock on Robinhood? As of 2021, you can’t be short on the platform. Maybe you want to short it regardless because the stock destined for failure has just announced a stock offering or the word on the street is the company makes no money. The financial markets are a vast ocean of opportunities waiting for you to grab hold of them. But to monetize these opportunities, one has to be skilled and knowledgeable. Regardless, you must find another broker if you want to short-share the stock because Robinhood will only let you go long.

The stock market provides exciting and attractive trades and opportunities daily. People use their knowledge and abilities to capture these movements, generating great profits. Whether in a bull or bear market, a trader or investor can benefit financially from both trends.

Chart by TradingView

What Does It Mean to “Short” a Stock?

Shorting a stock, or short selling, is a trading strategy speculating on the decline in the price of a stock or other security. The trader will make money when the price of the stock goes down.

If the price of a stock rises after a trader has shorted it, it’ll result in a loss. Thus, this relatively risky strategy should only be performed when one has gained sufficient information. Knowing how to read and react to the market moves is important.

The process of shorting a stock may seem very complex at first. However, it’s a relatively easy process. The trader or investor borrows a stock.

Then, the stock is sold in the market, and then, finally, the stock is bought at a lower price and returned to the lender. However, shorting a stock is riskier than going long on a stock, as there is no limit to how much a stock can fall.

But it gives the trader an edge and opportunity to earn profits even when the market is in a downtrend or bearish.

If you want to know how to short a stock in Robinhood, you may also want to know if you can day trade on Robinhood.

How to Short a Stock on Robinhood

Advantages of Learning How to Short Sell a Stock on Robinhood

  • The biggest advantage to short selling a stock is having the ability to make money even when the stock goes down or decreases in value.
  • Another advantage of short selling is that it can hedge your portfolio or active positions. It can be used as a hedging tool for your securities.
  • Potential to earn a handsome profit as stocks can fall in value quite powerfully. 

Disadvantages of Learning How to Short Sell a Stock on Robinhood

  • Short selling a stock can be risky as volatility can sometimes be extreme when the market is bearish.
  • At certain times, exchanges can also ban short-selling during extreme volatility to stabilize the market.
  • Borrowing less liquid stocks for short selling may be expensive and difficult.

$HOOD Stock Rover Report

Can You Short Stocks on Robinhood?

Robinhood is an online stock brokerage that allows traders and investors to purchase stocks and ETFs without paying commissions. While that may be an advantage, you still can’t short-sell a stock on Robinhood. So, short selling is not possible on this trading platform. While other brokers offer this facility, Robinhood does not allow its users to sell a stock short.

But, as a trader or investor, the stock market provides amazing opportunities to profit from short selling. We’ll discuss some methods and alternatives to shorting a stock on Robinhood.

This way, you can profit while the stock or security decreases or is bearish. So, let’s discuss some ways you can use it as an alternative to shorting a stock on Robinhood.

Trading Put Options

A popular way to profit when the value of a stock goes down is by buying put options. A put option is inversely sensitive to the price change of a stock.

So, if the underlying stock’s price decreases, the put option’s value increases. Similarly, a put option shall lose its value when the price of the underlying stock increases.

This gives the trader a method to profit from the decrease in the price of a stock. Put options give the trader holding the option a right to sell a stock at a certain price, but they’re not obligated to do so.

The option value is sensitive to the price of the underlying assets. The option strike price, time decay, interest rates, etc., can all be affected by volatility in the underlying stock price.

Advantages of Trading Put Options on Robinhood

  • The first advantage is the ability to profit when the underlying stock price decreases because Robinhood doesn’t allow short selling, which is a great alternative.
  • Options allow the trader to utilize high levels of leverage, thus giving the trader an advantage and the ability to maximize their gains.
  • Trading options allow the trader to create and use unique and effective strategies while optimizing their profits.

Disadvantages of Trading Put Options

  • The first disadvantage of trading put options can be the complicated nature of options. Understanding options takes time and effort and can overwhelm a new trader.
  • Options tend to have higher spreads because of the lack of liquidity, leading to indirect costs and decreasing your profits.
  • Another disadvantage is that options are not available for all stocks and securities.
COURSE
Day Trading Course Options Trading Course Futures Trading Course
DESCRIPTION Learn how to read penny stock charts, premarket preparation, target buy and sell zones, scan for stocks to trade, and get ready for live day trading action
Learn how to buy and sell options, assignment options, implement vertical spreads, and the most popular strategies, and prepare for live options trading How to read futures charts, margin requirements, learn the COT report, indicators, and the most popular trading strategies, and prepare for live futures trading
INCLUDED

How to Short a Stock on Robinhood Explained

Do you know how to short a stock on Robinhood? Unfortunately, if you can’t. Hence, Robinhood option trading can come in handy here. As a result, you can ride the move down; while bypassing the inability to short.  

Using Inverse Exchange Traded Funds – Inverse ETFs

Another way traders can benefit when the price of a stock goes down is to buy or invest in inverse ETFs. An inverse ETF is a fund constructed using several types of derivatives to profit from the decline in stock value or security.

It’s similar to short-selling a stock; the method is different. They are often called ‘Short ETFs’ or ‘Bear ETFs,’ and they let the trader gain financially from a stock’s price decline.

Just like shorting a stock, inverse ETFs use futures contracts or derivatives to allow the investor to gain when the market or stock is bearish.

And this alternative method to short-selling stocks is relatively simple. The person only has to purchase the inverse ETF and wait for the underlying assets to decline in price to get a profit.

Advantages of Inverse ETF

  • The first benefit is that inverse ETFs allow investors to generate profits even when the market or underlying stock declines.
  • Inverse ETFs can help investors hedge their positions and portfolios, providing great opportunities to hedge their investments.
  • Inverse ETFs are available for almost all stocks and most market indices.

Disadvantages of Inverse ETF

  • There are high fees involved when dealing with inverse ETFs.
  • Holding Inverse ETFs for more than a day can lead to several losses for an investor.
  • Inverse ETFs can often lead to huge losses for investors if they do not judge and analyze the direction or trend of the stock correctly.

Where Can I Short a Stock?

Since we’ve learned how to short a stock on Robinhood (you can’t), how can we get in on the action? First, you’d have to find a broker that allows shorting. Interactive Brokers is an example of a shorting broker. Once you have a shorting broker, you can trade bearish patterns and technical analysis.

Selling Bear Call Spreads Instead

Another alternative to short-selling a stock is to sell bear call spreads. A bear call spread or bear call credit spread is a type of option strategy often used by traders when they expect the price of an underlying stock or security to decline.

While it’s an advanced strategy that can only be used with proper knowledge about options, this strategy allows traders to profit in bear markets.

Selling a bear call spread is done by purchasing call options at a specified strike price and selling the same number of calls with the same expiry.

But they will be at a lower strike price. Bear call spreads will give the trader a premium or upfront money, which is why they are called credit call spreads. This strategy allows the trader to profit from the decline in the value of a stock.

Advantages of Bear Call Spreads

  • Another advantage that bears call spread offers is the low or reduced risk, compared to selling or writing a naked call.
  • The first advantage is that the trader can monetize or gain profits when the stock or security is bearish.
  • It is a unique strategy that can allow the trader to profit from a decline in the value of a stock while risking a limited amount of their capital, and it has a lower margin requirement.

Disadvantages of Bear Call Spreads

  • There is a high amount of risk if the stock price rises as a result of extreme volatility.
  • Implementing this strategy requires the stock to have elevated volatility, and therefore, it can be used only in certain market conditions.
  • One of the disadvantages of this option strategy is that the profit or gains are limited and may not be enough when compared to the trading risk involved.

How to Short a Stock on Robinhood Conclusion

Unfortunately, you can’t be short on Robinhood. That’s ok. There are plenty of ways to trade and be a bear and still make money as a trader. 

While short selling may be risky, the profits or gains it can deliver are often attractive. And with the above knowledge on how you can gain financially when the price of a stock declines.

You can make profits in bear markets, even on Robinhood. However, we suggest you first understand what short selling is and learn how to analyze the markets properly.

Without knowledge, going in for a trade or investment can lead to huge losses. So, with knowledge and proper skills, take advantage of this wonderful opportunity that the financial markets offer.

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