Why Can’t I Short Some Penny Stocks?

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Many traders check the daily list of winners and losers on their examiner and find an overspending penny that could be a favorable short-selling opportunity.

But when they shorten the stocks, their broker frustratingly stops them, and lets the trader ask “Why can’t I shorten some penny stocks?”

The short answer is because yours a broker cannot find shares for you to borrow.

There are several reasons why this can happen, which we will detail in this article.

To fully understand why you cannot shorten some penny stocks, we need to understand the mechanism of short selling on the stock exchange.

When you sell a short stock, you sell shares that you do not own. It might seem strange that you can sell something you don’t own. You may be asking, “isn’t that how to create new stocks?”

But it’s completely normal, you just temporarily borrow the shares of someone who owns them.

You sell them up front and then buy them to return the shares to the legal owner. If you profit in between, you have made a good business.

This is roughly how the process works, although this is automated at present. You will not call your broker to arrange locations.

  • You decide you want to sell stock XYZ briefly
  • You call your broker to find XYZ shares so you can shorten them.
  • Your broker calls Mutual Fund A, which owns a large block of XYZ, to see if they can lend you some. The Mutual Fund agrees to lend you the shares with an interest rate of 0.5%.
  • You now have your place and can sell the stock briefly

Your Stock is on the Hard Loan List

You can divide stocks into two levels when it comes to short selling at US brokers: easy to borrow and hard to borrow.

Stocks like Apple (AAPL) or Johnson & Johnson (JNJ) are easy to borrow. There are almost always many stocks to borrow and you don’t need to manually locate them. When you try to short-sell them, it will be like you have already borrowed them.

You need to locate hard-to-borrow stocks manually. Usually it’s as simple as typing the token symbol and the number of shares you want to shorten into their local screen, which is usually hidden in a menu within their trading platform.

The problem is that they are called difficult to borrow for a reason because it is difficult to borrow them, and therefore sell them short.

You can think of lending stocks as a market in itself.

Because you need to pay an interest rate when you borrow shares to shorten a sale, there is a supply and demand mechanism in the borrowing market. When everyone wants to shorten the same low buoyancy stock at the same time, there is simply too much demand and too little supply.

When you have trouble borrowing hard-to-borrow stock, there are two possible scenarios: (1) your broker has bad places, or (2) everyone has bad places and no one can find places on the stock.

You can partially overcome these problems by using brokers more specialized in locating hard-to-borrow stocks. We’ll get into that in a later section.

Why Do Some Shares Lend?

The short answer is supply and demand.

Just as all Bitcoin buyers increase the price, all wanting to shorten same stocks at the same time find it difficult to borrow because few stocks are loanable.

This usually happens in stocks with a low public float.

A stock float is the amount of shares circulating on exchanges that have no limits. Think of the situation where a stock with a low float that never moves suddenly has the latest news. The trading population of the shares has recently multiplied several times with the same amount of shares circulating.

So there are few stocks to go around. It is not uncommon to see a stock market trade several times its floating in daily volume when it has huge latest news.

Of course, when there are few stocks to go around, there are few stocks to borrow. And if you don’t have a fancy precious account open at a prestigious bank like Goldman Sachs, you probably won’t see the sites

Your Broker Will Not Allow You To Shorten The Stock

Brokers manually restricting their clients to buy or sell certain stocks have become much more common in 2021 with the advent of the crazy short pressures on stocks like GameStop.

In the era of self-stocks, there is a much higher risk that you will blow up your account and owe money to your broker during a stock shortening, so sometimes brokers deem it necessary not to even allow you to shorten it.

When you miss a stock, you borrow the stock from your broker, making your broker your creditor. They have no obligation to extend your credit to risk short penny stocks, just as you will not have to continue to give them your business.

There is a key distinction between brokers cutting off clients from buying cash security positions in self-stock, and extending credit to clients to shorten that same stock.

In this situation, your only choice is to use a different broker. If you regularly shorten penny stocks, you probably already have several brokerage accounts open.

How to Get Sites on Hard Loans

The simplest way to get places on hard-to-borrow stocks is to use a broker who specializes in the practice. Stock lending is still a related business, and retail brokers who do not develop their loan desks will not have the best loans.

Here are some brokers that traders typically praise.

However, you get what you pay for.

These brokers not only have more than average minimum deposits (usually starting at around $ 25,000), but they pay more for their services. Expect to pay around $ 0.004 / share in commissions unless you accumulate a lot, and pay a monthly fee for a trading platform.

Another method is to have accounts opened with several major retail brokers such as Schwab, TD Ameritrade, ETrade, etc. This is a powerful game.

While none of these brokers have good places on hard-to-borrow penny stocks individually, combining their places will someday get you places you thought you might not have. Make no mistake, however, penny traders are not the target client of these brokers and their bad locations reflect that, so don’t expect too much.

One more method is to join a proprietary trading firm that usually has a main brokerage relationship with a major bank, ensuring borrowers much higher quality than retail brokers.

Bottom Line

It’s frustrating to be ready to trade just to be stopped in your tracks, greeted by that “HTB” indicator on your trading platform. But, you know what they say, “the enemy of art is the absence of limitations.”

It may sound strange, but sometimes swapping paths can help you stay patient.

If you are used to finding business ideas and not taking them, it will prevent you from impulsively hitting your heat as soon as the diagram looks interesting.

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