This last weekend I decided I wanted to short a stock. It is something that I normally don't do and in fact the last time I shorted anything was over 10 years ago. But I saw a stock that I thought was too high that had been going steadily up for some time now and I thought it might have a pullback sometime soon.
The stock market as a whole has also been going up now for a while and I think a correction could possibly be around the corner (my opinion). So those two factors along with a few more reasons made me want to short the stock and I decided to do that on Monday.
I have an E*Trade account with plenty of cash in it but I wasn't sure they would let me short a stock and when I tried the system wouldn't let me. It turns out you need to have a margin account which I didn't have so in order to short anything, I would have to apply for a new margin account or upgrade my existing account.
I clicked the button to upgrade my account and was led to another page I had to fill out. The information they wanted included things like net worth, yearly income, and other things like that I didn't really want to divulge. In addition to that I had to agree to their terms and conditions for a margin account and wow, that was a LONG and complicated page of legalese.
When you short a stock you are borrowing money from the broker and that is the main reason why you have to agree to all sorts of things that might make you uncomfortable. The main thing you need to understand is that they can force you to get out of the position if you start losing money and don't have enough cash to back it up. The broker can sell your other stocks at any time and they can cover your short at their discretion because they don't want to lose money.
The best way to avoid anything like that from happening is to have more than enough cash in your account to cover any losses you might have if your short stock starts going up. In my case I will cover my short way before I lose more than I have in cash so I should be alright.
Once I applied for the upgrade to the margin account I was able to short the stock right away even before being approved. This might be because I have a long history with E*Trade and so it might not happen that way for you. A couple days later I also go the notification that my margin account upgrade was approved.
Who can open a margin account and what the requirements are I don't know exactly. Suffice it to say that the more money you have in your account and the longer you have been with your broker will undoubtedly increase your chances of getting one.
So, now I am in the strange position everyday that all people who short stocks are in that I want the market to go up so all my long positions will make money but I want my one particular short stock to go down. It is a funny feeling and can give you mixed emotions betting against a stock and it is definitely not something I will do much of. I also don't suggest shorting stocks for a beginner because there is just too much risk for beginners to really understand and they should be learning how to pick winning stocks anyway.