September 4, 2014 By admin

Can You Short Sell Penny Stocks?

Contrary to what some traders believe, you are allowed to short sell penny stocks. This tends to surprise /confuse people mainly because investopedia.com has stated in the past it was illegal, obviously this has been proven incorrect by Tim Sykes. Learning to short sell makes you a more diverse and flexible trader because you can buy breakouts and short sell when the price drops. So this gives you the unique ability to make profits on the way up and on the way down. Statistically the odds should be in your favor since every penny stock pump and dump will inevitably collapse 90% following the promotion.  The hard part is finding shares to short before the stock crashes.

>>>>>>>  Jason Bond Picks Reviewed <<<<<<<

When shorting small cap stocks there is a number of factors that you should take into consideration:

1. Allocating Shares to Short is Becoming Increasingly Difficult

Trying to locate shares to short can be really difficult and time consuming. The margin rate is very high when you try to hold these stocks in the long term. Shorting will require you to open multiple brokerage accounts in order to find the best borrows. There is no single broker that will allow you to short sell every penny stock. If you setup accounts with the top 4 brokers this will allow you to short roughly 80% of your penny stock plays. But remember each broker has different account minimums so short selling is not ideal for people with small account sizes. Some of the best brokers for short selling penny stocks are Interactive Brokers, Speedtrader, TradeStation and Suretrader. Also brokers dont like the concept of short selling micro caps because it is extremely risky due to potential short squeezes.

2. A Margin Trading Account is Need

In order to short sell  you have to trade with margin, which on the other hand is not required when buying penny stocks. Whether you like it or not, when trading with margin you are borrowing money from your stock broker. Many traders dont feel comfortable borrowing from there broker. Also more capital is required to open a margin account than a cash account. If are required to put up 50% of the total position size that you want to short sell, as collateral. This is known as initial margin. If the stock you short increases then your margin levels will fall. When your margin levels fall below 30% your broker will have no choice but to issue a margin call. This  forces you to deposit more money into your account until your margin level is brought back up to 50%. If you dont do this your position will be liquidated immediately. Penny stocks can spike 50-100% in a short space of time due to unforeseen circumstances like a promoter sending out email alerts at random times throughout the day. You end up losing money purely because your timing was off.

3.Short Squeezes

When you short shares you are borrowing shares from someone who has a position in the company. The original owner of the penny stock, may ask for their shares back at anytime. This is can cause what is known as a buy in and can usually happen after a few days or 14 days. A broker may issue a buy in if you are in a losing position on one of your short sells. You essentially have little or no control of what happens, causing you to lose on the trade as the broker will buy back the shares at current market price. Buy ins cause short squeezes to increase the share price artificially as traders are being forced to cover there shares at around the same price levels.

My Conclusion

Short selling penny stocks in my opinion is not a viable long term strategy. Multiple stock brokers are required, potential short squeezes and competition is increasing because more people are trading penny stocks, so finding shares to borrow will become more difficult. Traders like Timothy Sykes, Tim Grittani, Nate Michaud and Michael Goode are out-liars and have compiled their profits in millions through thousands of small gains along the way. If you are interested in learning about this strategy you should check out Timothy Sykes website.