Robinhood is one of the most popular stock trading apps on the market. However, many Robinhood users are new to trading. If you’re a beginner who’s getting more confident in their trading abilities, you may be interested in shorting stocks. The obvious question is, what is the deal with Robinhood shorting?
Here, we’ll explain how short selling works and show you exactly how you can use Robinhood to make money when stocks fall.
What is Robinhood?
Robinhood is an innovative and disruptive platform in the online brokerage industry. The company, which was launched in 2014, has a mobile app that allows customers to buy and sell stocks, ETFs, cryptocurrencies, and other assets without paying a commission.
This app caters to new investors. Since it’s designed for beginners, Robinhood might not have the robust features that active traders need to support advanced trading strategies. However, if you’re not a professional day trader, it probably works well enough for most. It can handle basic day-to-day transactions, and the company is in the process of rolling out new features, like cash management and fractional share trading.
If you sign up for Robinhood now, you can get a free stock if you use this referral link.
What is Short-Selling or Shorting Stocks?
Shorting or short-selling is a scenario when a trader or an investor borrows stocks and sells them right away with the hopes of buying them at a lower price in the future. When he/she buys them at a lower price in the future, the trader will return the shares to the borrower and pocket the difference.
Short-selling stocks is riskier than buying them. When you short, the potential for loss is limitless. If you’re holding a stock in a traditional sense, also known as a “long” position, the worst that can happen is share prices go to zero and you lose all of your principal investment. However, with shorting, you’re losing money if prices go up, and there’s no limit to how high a stock’s price can go. As a result, there is no
Can You Short on Robinhood?
The simple answer is No. At the moment, there’s no Robinhood shorting. The free-trading app doesn’t support short-selling stocks on its platform. This could be because Robinhood supports passive short-term or long-term investors rather than active traders.
In addition to not supporting shorting, Robinhood lacks several features that active traders can use to trade stocks. Thus, the reason why Robinhood appeals more to beginners and not active day traders.
A few other free trading apps such as Webull support shorting stocks on their platforms. You can read more about the comparison between Webull and Robinhood here (link to Webull vs. Robinhood article).
Alternatives to Short Selling
While Robinhood doesn’t support short-selling, it allows buying put options. This is another more multi-dimensional way of shorting a stock. While some investors can use this method, it is not the same as shorting stocks. There are several factors that influence option prices outside of share prices, so predicting price movements can be complicated for the uninitiated. If you’re not comfortable trading options, this might not be the best course of action.
You can also use Robinhood to buy inverse ETFs. These funds are built on shorts, so they go up when the underlying index goes down. Since it’s an ETF, you can’t micromanage your holdings. However, it’s a viable alternative to selling short.
Pros of Shorting
- Short selling uses margin, so you don’t need cash upfront to make a trade.
- Traders can profit during a down market
- Shorts can function as a hedge on long positions.
Cons of Shorting
- Since your broker is loaning you shares, you’re on the hook for interest. Rates vary by broker.
- Since you use margin to short, the potential losses are limitless.
- Some stocks are more expensive to short than others.
- If you get caught in a short squeeze, you could be caught holding the bag while prices sky-rocket.
Shorting Stocks on Robinhood: Final Thoughts
Robinhood is one of the leading zero-commission stock trading apps available to traders and investors. It doesn’t support shorting stocks at the moment, but there are some viable alternatives that allow traders to make bearish bets. Put options and inverse ETFs are available on Robinhood, and they allow users to capitalize on bearish price action.
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