Robinhood is one of the most popular brokerage apps in the US, with over 18 million uses. While most Robinhood users are bullish on the stock market, not every stock will go up all the time. So, what happens when you find a stock that’s overvalued?
The real question is, can you short on Robinhood? In this guide, we’ll explain whether or not you can short stocks on Robinhood and show you how you can bet against companies. Let’s get started!
What is Short Selling?
Short selling is a form of betting that a stock will lose value rather than gain it. When you short sell a stock, you borrow the shares from your broker and then sell them immediately. Later, you’ll need to repurchase the shares to return them to your broker.
If the stock price drops between when you sell the shares and when you repurchase them, you get to pocket the difference as a profit. On the other hand, if the share price rises, you’re still responsible for repurchasing the shares at a loss.
One important thing to keep in mind when shorting a stock is that it’s not completely free, like buying a stock normally is at commission-free brokers like Robinhood. Since you’re borrowing the shares from your broker, you’ll need to pay interest on the value of the shares. The interest fee can be as low as 0.30% per year, or as high as 20% per year for heavily shorted stocks that are in high demand.
Why Short Sell a Stock?
The main reason to sell a stock short is because you believe the price will go down. You might think the stock is overvalued and that the price is due for a correction. Or, you might expect that a company will underperform during its next earnings report and the stock price will tumble as a result. You can also short stocks based on technical patterns, such as a loss of momentum or a bearish chart setup.
While there are other ways to bet that the price of a stock will go down, short selling is one of the simplest. At most brokers, anyone with a margin account can short sell a stock and the interest rates for short selling are usually quite low. In addition, short selling doesn’t necessarily involve leverage (although it can). So, the risk in short selling a stock is just based on the percentage change in the stock price, similar to the risk when you buy a stock.
Can You Short on Robinhood?
Although Robinhood is one of the most popular brokers for buying and selling all kinds of stocks, from penny stocks to ETFs, it does not allow short selling. There are other ways to bet against a stock on Robinhood – which we’ll get into below – but short selling isn’t supported on the platform.
Importantly, this is true even for paid Robinhood Gold subscribers who have access to margin trading accounts. You can use a margin account on Robinhood to buy shares with borrowed money, but you’re not allowed to immediately turn around and sell those shares for cash. If you sell the shares, the proceeds will automatically go towards covering the loan that Robinhood gave you.
Short Selling through Buying Put Options
While Robinhood doesn’t let you short sell stocks directly, you can still bet against individual stocks with the platform. The way to do that is by buying put options.
Put options are contracts that give you the right to sell a stock at a predetermined value, known as the strike price. Say you hold put options that give you the right to sell shares of Amazon for $3,000. If the stock price falls to $2,800, you can purchase shares at that price and then exercise your options to sell them for $3,000 each – a profit of $200 per share.
If the price of Amazon remains above $3,000, the options contracts will simply expire worthless. In that case, the amount of money you’ll lose is equal to the price you paid for the put options in the first place, which is known as the options premium.
Short selling with put options on Robinhood is riskier than traditional short selling. That’s because if the stock price doesn’t fall to the level you expected, you could lose the entire amount you paid for the options. By comparison, in a traditional short position, you can exit your position and only lose an amount equivalent to the percentage of price increase in the stock.
Put options are also complicated. Their value is influenced by the time until the contracts expire as well as the volatility in the underlying stock. So, while put options generally increase in value as the underlying stock’s price falls, this won’t always be the case.
To trade put options on Robinhood, your account must be approved for options trading. You can apply for options trading by providing information about your investment experience, income, and investment objectives.
Buying Inverse ETFs
Another way to short stocks on Robinhood is to buy inverse ETFs. Inverse ETFs are just like traditional ETFs in that they represent the value of many different stocks. However, inverse ETFs gain value when the value of the stocks underlying the ETF fall in value. Inverse ETFs typically contain put options, futures contracts, and short positions rather than stock holdings.
Many inverse ETFs are designed to enable traders to bet against the major stock indices. For example, the ProShares Short S&P 500 ETF (ticker symbol SH) moves opposite the S&P 500 index. The ProShares UltraPro Short QQQ is a leveraged ETF that moves up 3 points for every 1-point loss in the NASDAQ index.
Conclusion: Can You Short on Robinhood?
Although Robinhood doesn’t allow traders to short sell stocks, it’s still possible to bet against the market with this brokerage. You can buy put options to bet that the value of individual shares will fall, or you can buy inverse ETFs to place a bearish bet on the major US stock indices.