Shorting a stock on E*TRADE means borrowing shares, selling them at today's price, and hoping to buy them back cheaper later

A short sale is a bet that a stock price will fall. You borrow shares from E*TRADE's lending pool, sell them when ready at the current market price, and pocket the cash. If the price drops, you buy the shares back at the lower price, return them to E*TRADE, and keep the difference as profit. If the price rises instead, you lose money — potentially a lot of it, because there is no ceiling on how high a stock can go.

E*TRADE allows short selling through its standard brokerage account, but the process is not the same as buying. You must have a margin account (not a cash account), maintain a minimum balance, and understand that E*TRADE can force you to close the position if the stock becomes hard to borrow or if your account equity drops too far.

Key Takeaways

  • You need a margin account with at least $2,000 in equity to short on E*TRADE; cash accounts cannot short at all.
  • E*TRADE borrows shares on your behalf from its lending inventory, and you pay a borrow fee that varies by stock and changes daily.
  • Your maximum loss on a short sale is theoretically unlimited, while your maximum gain is capped at 100 percent of the stock price.
  • E*TRADE can force you to close a short position if the stock becomes hard to borrow, your margin balance falls below the maintenance requirement, or the company recalls the shares.

Setting up a margin account and meeting the minimum balance

Before you can short anything on E*TRADE, you must convert your account to a margin account or open a new one as margin from the start. A margin account lets you borrow money and securities from E*TRADE; a cash account does not allow borrowing of any kind.

If you already have a cash account, log into E*TRADE, go to Account Settings, and look for the option to upgrade to Margin. E*TRADE will ask you to agree to the margin agreement, which outlines the interest rates, fees, and risks. This takes a few minutes and is usually approved when ready.

E*TRADE requires a minimum of $2,000 in account equity to open a margin account. This is a federal requirement set by the Financial Industry Regulatory Authority (FINRA), not an E*TRADE rule alone. Once your account is margin-enabled, you can short, but E*TRADE will also enforce a maintenance requirement — typically 30 percent of the short position's current market value. If your account equity falls below that threshold, E*TRADE will issue a margin call and may force you to close positions or deposit cash.

How to place a short sale order in E*TRADE's platform

In E*TRADE's web platform or mobile app, the process looks almost identical to a regular buy order, but with one critical difference: you select "Sell Short" instead of "Sell" or "Buy."

Open the order ticket for the stock you want to short. Under the order type dropdown, choose "Sell Short" (not "Sell to Close," which is for closing an existing long position). Enter the number of shares, set your price limit or market order, and review the order before submitting. E*TRADE will show you the current borrow fee as a percentage per year — this is what you will pay for holding the position, charged daily to your account.

Once you submit, E*TRADE checks its lending inventory. If the shares are available to borrow, the order executes and the cash from the sale lands in your account. If the shares are not available — which happens with small-cap stocks or heavily shorted companies — your order may be rejected or placed on a locate list to wait for shares to become available. You cannot short a stock on E*TRADE if there are no shares to borrow, no matter how much margin you have.

Understanding borrow fees and daily costs

When you short a stock, E*TRADE charges you a borrow fee for the privilege of using those shares. This fee is expressed as an annual percentage rate but is calculated and deducted from your account daily. A stock with a 2 percent annual borrow fee costs you roughly 0.0055 percent per day.

The borrow fee varies by stock and changes constantly based on supply and demand in E*TRADE's lending pool. Stocks that are hard to borrow — because many traders are already shorting them or few shares are available — carry much higher fees, sometimes 10 percent or more per year. You can see the current borrow fee before you place the order, but it may change after you enter the position.

Beyond the borrow fee, you also pay interest on any margin you use to hold the position. If you short $10,000 worth of stock and your account has only $5,000 in cash, you are borrowing $5,000 from E*TRADE at the margin interest rate, which varies based on the amount borrowed and E*TRADE's current rates. Check E*TRADE's website for current margin rates, as they change with market conditions.

When E*TRADE can force you to close a short position

E*TRADE does not let you hold a short position indefinitely. The company can force you to close (called a "buy-in" or "forced liquidation") for several reasons, and you have little recourse once it happens.

The most common trigger is a margin call. If the stock price rises and your account equity falls below the 30 percent maintenance requirement, E*TRADE will notify you and give you a important date — usually one business day — to deposit cash or close positions. If you do not act, E*TRADE will close the short position automatically, locking in your loss at that moment's market price.

The second trigger is a borrow recall. If the shares you borrowed become unavailable — because the original owner wants them back, or E*TRADE's lending pool runs dry — E*TRADE will force you to buy the shares back and return them. This can happen suddenly and without much warning, especially with volatile or heavily shorted stocks. You will be forced to buy at whatever the market price is at that moment.

The third trigger is a corporate action. If the company you shorted announces a merger, bankruptcy, or delisting, E*TRADE may force you to close the position to protect itself from the legal and operational complications that follow.

Calculating profit and loss on a short sale

Your profit on a short sale is the difference between the price you sold at and the price you buy back at, minus all fees and interest.

Example: You short 100 shares of a stock at $50 per share. You receive $5,000 in cash. The stock falls to $40, and you buy 100 shares back for $4,000. Your gross profit is $1,000. But you owe E*TRADE borrow fees for the time you held the position — say $50 — and margin interest of $25. Your net profit is $925.

Your loss works the same way in reverse. If the stock rises to $60 instead, you must buy 100 shares for $6,000 to close the position. You lose $1,000 on the trade itself, plus fees and interest. Your total loss is roughly $1,075. Unlike a long position, where your maximum loss is the amount you invested, a short position's maximum loss is theoretically unlimited — a stock can rise to $100, $500, or higher, and you must still buy it back to close the position.

Common mistakes to avoid when shorting on E*TRADE

The biggest mistake is underestimating the risk. Many new short sellers think a stock will fall and do not plan for what happens if they are wrong. A 20 percent move against you on a short position wipes out your entire margin cushion and triggers a margin call. Always set a stop-loss order — an automatic buy order that closes your short if the stock rises to a certain price — before you enter the position.

The second mistake is ignoring borrow fees. On a stock with a 15 percent annual borrow fee, you are losing money every single day the position is open, even if the stock price stays flat. Calculate the daily cost before you short, and make sure the expected profit is large enough to cover it.

The third mistake is shorting illiquid stocks. If a stock has low trading volume, you may not be able to close the position when you want to. E*TRADE may also have trouble borrowing shares in the first place, leaving your order stuck in a locate queue. Stick to stocks with high daily volume — generally over 1 million shares per day — to may support you can enter and exit smoothly.

The fourth mistake is holding a short position through a company earnings announcement or major news event. Stock prices can gap up or down sharply on news, triggering a margin call or forced liquidation before you have a chance to react. Close or reduce your position before known catalysts.

Frequently Asked Questions

Do I pay dividends when I short a stock?

Yes. When you short a stock, you are obligated to pay E*TRADE any dividends the company declares while you hold the position. If the stock pays a $1 dividend and you are short 100 shares, you owe E*TRADE $100. This is another cost to factor into your profit calculation.

Can I short penny stocks or over-the-counter stocks on E*TRADE?

E*TRADE allows shorting of OTC stocks, but shares are often hard to borrow, and borrow fees can exceed 50 percent per year. Penny stocks are generally not shortable because E*TRADE cannot locate shares to borrow. Stick to stocks listed on major exchanges like the Nasdaq or NYSE.

What happens if I do not have enough margin to close a short position?

E*TRADE will close it for you at the market price, locking in your loss. You cannot hold a short position if your account equity falls below the maintenance requirement. The forced liquidation happens automatically, often at the worst possible time.

Can I short a stock that is already at a very low price?

Yes, but E*TRADE may not have shares available to borrow. Stocks under $5 are often hard to locate, and your order may be rejected or sit on a locate list indefinitely. Even if you can short it, the borrow fee is usually very high, eating into any profit.

How long can I hold a short position on E*TRADE?

There is no time limit, as long as you maintain your margin requirement and the shares remain available to borrow. However, the longer you hold, the more you pay in borrow fees and interest. Most short positions are closed within days or weeks, not months or years.