Can You Short Penny Stocks?
Can you short penny stocks? The simple answer is "Yes", you can short penny stocks under $5. However, I don't recommend beginners do that because shorting requires more skills and is way riskier than buying.
How Does Shorting Penny Stocks Work?
When you buy a stock, the most you can lose is all the money that you invested in that stock. If you bought $5,000 worth of shares on a $10 stock, if the stock ever goes from $10 to $0, the most you can lose is the $5,000 that you invested on the stock.
On the other hand, when you short a stock, you could lose more money than the money you invested. When you short a stock, you are essentially betting the stock would go down. If a stock goes up, you lose money.
In theory, a stock can go up as high as possible. If a stock went from $1 to $10, you will lose 10 times the money that you had invested for that stock. In reality, you will get margin calls from your broker to cut the position or add more money.
Penny Stocks Shorting Restrictions?
There are more restrictions and downsides to shorting than buying penny stocks. Shorting requires a margin account and you need to have a minimum of $25,000 for a margin account.
Many stockbrokers do not allow shorting in penny stocks. You will need to find a broker that does allow shorting in penny stocks and have shares that you can short with.
Some penny stocks are hard-to-borrow (HTB), so even with a broker that does allow shorting, they may not have the shares that you can short with.
When shorting stocks, you are actually borrowing shares from your broker and need to pay additional fees just to borrow the shares. Some brokers charge a high fee for borrowing shares, so the cost of shorting could get very expensive. Even when you are making money from shorting penny stocks, the fees could eat up a good portion of your profit. If you are losing money, the fees will compound your losses quickly.
Beginners should stay away from shorting penny stocks, and experienced traders should be cautious if they ever choose to short penny stocks. There are ways to make money from penny stocks by going long on stocks.
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