Robinhood ranks among the most popular brokerage apps in the US, boasting over 18 million users. Most Robinhood investors maintain a bullish outlook on the stock market, but not every stock climbs consistently higher. This raises an important question: what’s your move when you discover an overvalued stock?
The key question becomes: can you short on Robinhood? This comprehensive guide will clarify whether short selling stocks is possible on Robinhood and reveal alternative strategies for betting against companies. Let’s dive in!
What is Short Selling?
Short selling represents a strategy for profiting when stock prices decline rather than rise. The process involves borrowing shares from your broker and immediately selling them in the market. Eventually, you must repurchase these shares to return them to your broker.
When the stock price falls between your initial sale and eventual repurchase, you pocket the difference as profit. However, if share prices climb higher, you’re still obligated to buy back the shares at a loss.
Keep in mind that shorting stocks isn’t completely free like standard stock purchases at commission-free brokers such as Robinhood. Because you’re borrowing shares from your broker, interest charges apply to the borrowed value. These interest fees range from as low as 0.30% annually to as high as 20% per year for heavily shorted stocks with high borrowing demand.
Why Short Sell a Stock?
The primary motivation for short selling stems from believing a stock’s price will decline. You might view the stock as overvalued and anticipate a price correction, or expect disappointing earnings results that could trigger a price drop. Technical analysis also drives short selling decisions, such as identifying momentum loss or bearish chart patterns.
Although alternative methods exist for betting against stock prices, short selling stands out for its simplicity. Most brokers allow margin account holders to short sell stocks, typically at reasonable interest rates. Additionally, short selling doesn’t inherently require leverage (though it’s possible), making the risk profile similar to traditional stock purchases—based purely on percentage price movements.
Can You Short on Robinhood?
Despite Robinhood being among the most popular platforms for trading various securities—from penny stocks to ETFs—it doesn’t support short selling. While alternative methods exist for betting against stocks on Robinhood (discussed below), traditional short selling remains unavailable on the platform.
This limitation applies even to paid Robinhood Gold subscribers with margin trading access. While you can use a margin account on Robinhood to purchase shares with borrowed funds, you cannot immediately sell those shares for cash. When you sell shares purchased on margin, the proceeds automatically apply toward repaying your Robinhood loan.
Short Selling through Buying Put Options
Although Robinhood prohibits direct short selling, you can still bet against individual stocks through the platform by purchasing put options.
Put options are contracts granting you the right to sell stocks at a predetermined strike price. For instance, if you hold Amazon put options with a $3,000 strike price and the stock drops to $2,800, you can buy shares at market price and exercise your options to sell them at $3,000—earning $200 profit per share.
Should Amazon’s price stay above $3,000, your options contracts expire worthless. Your loss equals the premium you initially paid for the put options.
Using put options for short selling on Robinhood carries greater risk than traditional short positions. If the stock doesn’t decline to your expected level, you could lose your entire options premium. In contrast, traditional short positions allow you to exit early with losses limited to the stock’s percentage price increase.
Put options involve additional complexity since their value depends on time until expiration and underlying stock volatility. While put values generally rise as stock prices fall, this relationship isn’t guaranteed.
Trading put options on Robinhood requires options trading approval. The application process involves providing details about your investment experience, income level, and investment objectives.
Buying Inverse ETFs
Purchasing inverse ETFs offers another approach to short stocks on Robinhood. Inverse ETFs function like traditional ETFs by representing multiple stock values, but they gain value when their underlying stocks decline. These funds typically hold put options, futures contracts, and short positions instead of actual stock holdings.
Most inverse ETFs target major stock indices for bearish bets. The ProShares Short S&P 500 ETF (SH) moves inversely to the S&P 500 index, while the ProShares UltraPro Short QQQ provides leveraged exposure—gaining 3 points for every 1-point NASDAQ decline.
Conclusion: Can You Short on Robinhood?
While Robinhood doesn’t permit traditional stock short selling, traders can still implement bearish strategies through this brokerage. Put options enable betting against individual stock values, while inverse ETFs provide opportunities for bearish positions on major US stock indices.
