Can I short sell penny stocks?

[Paul Beck]

[Justin Freeman]

Short selling, which is when you borrow shares from your broker hoping the stock price will fall and you can then sell them back at a lower price and keep the difference, is a risky trading strategy. When you apply short selling to penny stocks, it becomes downright dangerous. Many brokers will even tell you it isn’t possible to short sell penny stocks. That isn’t technically true. While your broker may have its own internal rules against shorting penny stocks, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have no such regulations. The truth is that most brokers have a short list of stocks they allow for short selling without additional requirements. If the stock you want to short isn’t on this list you’re out of luck, unless the broker will check with their securities lending department to see if the brokerage owns the security so you can borrow it from them to short. The stocks available to short differ from one broker to another, and the choice to allow you to short sell a security is completely up to the broker.

Short Selling Penny Stocks at Traditional Brokers

While traditional brokers like Fidelity and Charles Schwab will give you trust and stability, they also impose strict rules on short selling. Finding a traditional broker that allows short sales of penny stocks is a difficult task since larger brokers avoid the activity. You might have more luck finding a small boutique broker that will allow you a margin account to short sell penny stocks.

Short Selling Penny Stocks at Online Brokers

Online brokers are more likely to be flexible enough to allow you to short sell penny stocks. Large online brokers such as TD Ameritrade and eTrade have recently loosened their requirements and allow for some short selling in penny stocks. The only requirement is that you open a margin account with them with a minimum deposit of $2,000. You’ll also be able to short sell penny stocks through smaller online brokers such as Sure Traders and SpeedTrader.

[Filipe Fittipaldi]

Hey Paul,

Most of the brokers will tell you that you can only short sell stocks that trade above $5. While this may be the case in your particular brokerage company, it’s not a regulatory measure taken by the Financial Industry Regulatory Authority (FINRA) or the Securities and Exchange Commission (SEC).

The best you can do is to talk to your broker. Many brokerage firms have a “short list”, which contains securities that the firm allows investors to short sell. If the asset you want to short sell isn’t on that list, your broker will have to contact the securities lending department and find out if the brokerage owns enough of that asset for you to short sell. 

Different brokerage firms have different shortlists and it’s your broker’s call whether he/she will let you short sell a particular security.