Shorting Stocks in Canada

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To quickly summarize, shorting a stock is a bet that the stock will go down rather than up.

Shorting is essentially the process of borrowing shares of a company from your stock broker, selling the shares at market price and then buying the shares back at a later date to return to your broker (with any luck for you at a lower price). Essentially, a stock short is the opposite of a long purchase of a share. When you short, you are hoping that the share price will drop. The same as a long, there is a winner and a loser in every transaction.

Shorting a stock has a few differences from going long (aside from the inverse difference). To short a stock, you broker has to have access to a specific holder of the stocker (whereas to buy, shares merely have to be available on the market as a whole). Because of this, there may not be shares available to short. Your broker will most likely be charging you interest to borrow these shares. Interest varies from share to share, so you will need to check with your Canadian broker specifically what interest they charge to borrow a specific share. Some shares may be very expensive and therefore prohibitive to short. Some shares may be off limits to shorting period. Whether this is by the exchange or a government edict, some shares just aren’t available to anyone to short.

Shorting any amount of shares is equivalent to buying a stock on margin – regardless of how much money you have available in your trading account. A stock can, in theory, go up indefinitely, therefore you can lose an infinite amount of money shorting (in theory – not stock is going to appreciate infinitely in price!). Because of this, a bad short can exceed the amount of money you have in your trading account if it appreciates. In this situation, your broker will give you a margin call. Where they demand either you provide more money to you account or they will cover the short for you.

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