How to Short a Stock on Robinhood Explained

  • October 24, 2020

Do you know how to short a stock on Robinhood? The financial markets are a vast ocean of opportunities, waiting for you to grab hold of them. But in order to monetize these opportunities, one has to be skilled and knowledgeable.

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 it is a bull market or a bear market, a trader or investor can financially benefit from both the trends.

How Do You Profit With Shorting?

  • Now you may ask how one can profit when the markets are in a downtrend or are bearish. Well, in the financial world one can financially benefit when the value of a security goes down by shorting the stock. It might seem strange to you but one can gain profits and benefit financially by shorting a stock when it is bearish. Let's explain in detail what shorting a stock means.
How To Short A Stock On Robinhood

1. What Does It Mean to “Short” a Stock?

Shorting a stock, or short selling is a trading strategy that speculates 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 the stock, it'll result in a loss. And thus this is a relatively risky strategy that 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 sells the stock in the market, and then finally buys the stock at a lower price and returns it back 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 it is bearish.

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

2. Advantages of Learning How to Short Sell a Stock on Robinhood

  • The biggest advantage to short sell 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 down in value quite powerfully. 

3. Disadvantages of Advantages of Learning How to Short Sell a Stock on Robinhood

  • Short selling a stock can be risky as volatility can be extreme in some cases when the market is bearish.
  • Certain times, exchanges can also ban short-selling during extreme volatility to stabilize the market.
  • It may be expensive and difficult to borrow less liquid stocks for short selling.

Can You Short Stocks on Robinhood?

  • Robinhood is an online stock brokerage, that allows traders and investors to purchase stocks and ETFs without paying any 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 various other brokers offer this facility, Robinhood does not allow its users to short sell a stock.

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 goes down in value or is bearish. So let’s discuss some ways that you can use as an alternative to shorting a stock on Robinhood.

1. 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 price of the underlying stock 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.

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.

2. Advantages of Trading Put Options on Robinhood

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

3. Disadvantages of Trading Put Options

  • The very first disadvantage while trading put options can be the complicated nature of options. Understanding options takes time and effort and can be overwhelming for a new trader.
  • Options tend to have higher spreads because of the lack of liquidity and this will lead to indirect costs, decreasing your profits.
  • Another disadvantage is that options are not available for all stocks and securities.

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.  

1. 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 in order to profit from the decline in the value of the stock or security.

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

Just like shorting a stock, inverse ETFs use futures contracts or derivatives to allow the investor to make gains 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 decline in price to get a profit.

2. Advantages of Inverse ETF

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

3. Disadvantages of Inverse ETF

  • There is a high amount of 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 the 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. 

1. Selling Bear Call Spreads Instead of Learning How to Short a Stock on Robinhood

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 a trader 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.

The process of selling a bear call spread is done by purchasing call options at a specified strike price and simultaneously, 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, that is why it is also called a credit call spread. And this strategy allows the trader to profit from the decline in the value of a stock.

2. Advantages of Bear Call Spreads

  • Another advantage that bear call spread offers is the low or reduced amount of risk, as 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.

3. 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 that this option strategy is that the profit or gains are limited and may not be enough when compared to the risk involved.

How To Short A Stock On Robinhood Conclusion

Unfortunately you can't 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 a risky task, 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 would suggest that you first understand what short selling is and learn how to properly analyze the markets.

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

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