Guapo
05-11-2009, 12:36 PM
This question has been discussed in several threads on HSM over the past year or so. Some people have said you can without giving any particulars. Some folks have said you can’t under any circumstances. A few individuals have posted, hinting they’re shorting such-and-such penny stock. They’ve failed to give details how they’re doing it though.
Some HSM~ers have said they were told by Ameritrade they could short penny stocks but $2.50 was needed for each shorted share. Others have stated Ameritrade told them they could not short any stocks under $5.
Then just recently, Sowned69 posted a link on HSM to the Interactive Brokers’ web site on the subject.
(BTW, Thanks to Sowned69. It was his post that led to this article.)
I checked four brokers, Ameritrade, Choicetrade, Etrade and Interactive Brokers. The information in this article was taken from their web sites. I also had several email exchanges with Interactive Brokers. I looked for information from several other brokers but didn’t find anything on their sites.
Etrade and Choicetrade do not allow shorting of any stocks under $5 a share. Ameritrade and Interactive Brokers do but with severe restrictions for most of us.
Let’s discuss Interactive Brokers first. From their web site (in italics below):
http://www.interactivebrokers.com/en...?ib_entity=llc
Short Marginable Positions:
If last sale price/share < $5, then maximum ($2.50 per share, 100% stock value)
What this means is “For stocks trading at less than $5.00/share, the margin requirement is the greater of $2.50/share or 100% of the stock value.”
The phrase Short Marginable Positions and the sentence above in quotation marks above might be confusing because in this case, it’s not really margin. That is, you aren’t borrowing money to short the stock. You’re actually required to have $2.50 in your account for each share you want to short or cash/buying power equal to the total short-sale price of the stock, whichever is greater.
For example, if you want to short 1000 shares of a stock at $3 a share, your account must have $3000 in it, since it’s the great number ($2.50 x 1000 shares = $2500).
How about shorting 1000 shares of a stock at $1 a share? The total cost of the stock is $1000. You have to meet the higher of the two figures, so in this case you need a minimum of $2500.
That doesn’t seem so awful, does it? However, what if you had wanted to short 100,000 shares of LSMJ when it was sitting at .0012 a week or so ago? LSMJ is now at .0003. Ah, seems like you would have made some nice change.
However, to short 100,000 shares of LSMJ you have to have $250,000 in your account ($2.50 x 100,000). If you had shorted 100,000 shares of LSMJ at .0012 and covered at .0003, you would have made $90 (.0012 minus .0003 X 100,000 = 90). You made a profit but it isn’t really a killing.
Ok, let’s short a larger amount of shares, 1 million at .0012. This time your profit would be $900. It’s decent money but you would have needed $2,500,000 in your account.
Let’s say you want to increase your profit to $9000, so you need to short 10,000,000 shares. To do so you must have $25,000,000 in your account. I don’t know about you but if I could afford to put $25 million in my brokerage account, I wouldn’t be fooling around with penny stocks. I’d be cruising around on my 200-foot yacht.
Let’s say you shorted 100,000 shares of a stock at .0050 and covered at .0005. Your profit would have been $450 (.0050 minus .0005 X 100,000). Hmm! $450 is ok but you won’t get rich doing it this way.
If you had shorted ten times as many shares, 1 million, your profit would have been $4500. $4500 is nothing to sneeze at, but you would have needed the $2.5 million in your account again.
Some HSM~ers have said they were told by Ameritrade they could short penny stocks but $2.50 was needed for each shorted share. Others have stated Ameritrade told them they could not short any stocks under $5.
Then just recently, Sowned69 posted a link on HSM to the Interactive Brokers’ web site on the subject.
(BTW, Thanks to Sowned69. It was his post that led to this article.)
I checked four brokers, Ameritrade, Choicetrade, Etrade and Interactive Brokers. The information in this article was taken from their web sites. I also had several email exchanges with Interactive Brokers. I looked for information from several other brokers but didn’t find anything on their sites.
Etrade and Choicetrade do not allow shorting of any stocks under $5 a share. Ameritrade and Interactive Brokers do but with severe restrictions for most of us.
Let’s discuss Interactive Brokers first. From their web site (in italics below):
http://www.interactivebrokers.com/en...?ib_entity=llc
Short Marginable Positions:
If last sale price/share < $5, then maximum ($2.50 per share, 100% stock value)
What this means is “For stocks trading at less than $5.00/share, the margin requirement is the greater of $2.50/share or 100% of the stock value.”
The phrase Short Marginable Positions and the sentence above in quotation marks above might be confusing because in this case, it’s not really margin. That is, you aren’t borrowing money to short the stock. You’re actually required to have $2.50 in your account for each share you want to short or cash/buying power equal to the total short-sale price of the stock, whichever is greater.
For example, if you want to short 1000 shares of a stock at $3 a share, your account must have $3000 in it, since it’s the great number ($2.50 x 1000 shares = $2500).
How about shorting 1000 shares of a stock at $1 a share? The total cost of the stock is $1000. You have to meet the higher of the two figures, so in this case you need a minimum of $2500.
That doesn’t seem so awful, does it? However, what if you had wanted to short 100,000 shares of LSMJ when it was sitting at .0012 a week or so ago? LSMJ is now at .0003. Ah, seems like you would have made some nice change.
However, to short 100,000 shares of LSMJ you have to have $250,000 in your account ($2.50 x 100,000). If you had shorted 100,000 shares of LSMJ at .0012 and covered at .0003, you would have made $90 (.0012 minus .0003 X 100,000 = 90). You made a profit but it isn’t really a killing.
Ok, let’s short a larger amount of shares, 1 million at .0012. This time your profit would be $900. It’s decent money but you would have needed $2,500,000 in your account.
Let’s say you want to increase your profit to $9000, so you need to short 10,000,000 shares. To do so you must have $25,000,000 in your account. I don’t know about you but if I could afford to put $25 million in my brokerage account, I wouldn’t be fooling around with penny stocks. I’d be cruising around on my 200-foot yacht.
Let’s say you shorted 100,000 shares of a stock at .0050 and covered at .0005. Your profit would have been $450 (.0050 minus .0005 X 100,000). Hmm! $450 is ok but you won’t get rich doing it this way.
If you had shorted ten times as many shares, 1 million, your profit would have been $4500. $4500 is nothing to sneeze at, but you would have needed the $2.5 million in your account again.