LEVEL: BEGINNER
The Zolio platform allows you to buy and sell stocks, but it also allows you to sell short–a type of borrowing mechanism whereby your interest in a stock is inverse to the stock’s movement. (See also “Overview of Short Selling” in the Learning Center under Trading Strategies and Styles tab.) In other words, if you have 1,000 shares in a stock and it goes down by 1 point, you earn $1,000.
When to Short
Shorting decisions can be made using the same model-building, technical analysis, and macroeconomic assessments that long stock buying decisions can be made, but shorting has two extra dimensions that need to be considered. Firstly, when shorting you are essentially borrowing a stock and will have to pay it back. This is an important consideration that is treated uniquely on the Zolio platform (see “Limits on Shorting” below).
Secondly, and more importantly, is the high level of risk involved with shorting a stock. A short position is based on a belief that a stock will go down, but it can go up–theoretically, it can go up an infinite amount. Thus while the amount of money you can lose on a long position is set by how much you have invested, the value of your short position can theoretically become negative into infinity. Thus shorting involves a higher level of risk than being long a position.
Executing the Trade and Seeing the Short in Your Portfolio
To short on Zolio, you first need to click on the “Trade” button at the top of the screen. Then select the ticker you want to short, choose “Sell”, the amount of shares you want to sell short, and what price you want to sell short at. Selling short at market is possible, but is not recommended. If you sell short at market, there is a small (very small, but extant) chance that you will wind up entering at a level far lower than the market price. So, for example, if you sell short a stock that is currently trading at $10 and someone has put a limit order to $9 and there is low liquidity, you might wind up getting the stock at $9 and being out already $1 per share. The chances of this are quite slim, but higher in low volume stocks and much higher outside regular trading hours. Limit orders are good risk-minimizers for both buying and selling.
After you click “place order”, the order should be complete and you should now have the short position in your portfolio, which you can see by clicking on the “Portfolio” button at the top of the screen.
Here you will see a list of your long and short positions, separated by type. You are able to see here that the Amazon shares are in red and listed in the PnL column in parenthesis meaning they are a negative number.
If, at some point, you were to have a long position of 1000 shares, and then shorted or sold 1500 of the same stock, your net position at that point would be 500 shares short. Those 500 shares would show up in the short section within the portfolio tab.
Additionally, there will be a “flat” category for short positions that you have filled.
Cost to Short
As with all brokers, there is a cost to borrowing a stock. The cost on Zolio for financing a short is 300 basis points per annum of the total order.
Buying to Cover
When you are short a stock, you have borrowed the stock from your brokerage, and one day you will need to give that stock back, which is done simply by buying the stock. This is called “buying to cover”. On Zolio, you buy to cover just like you would go long a position: on the trade window, choose buy, the ticker you wish to buy, the amount of shares, your limit or stop order, and then place the order.
After you have covered your position, your former short will be flat, and will show up as a flat position in your portfolio; in the image above, you can see that a former short in LinkedIn (LNKD) was covered out.
When you are short a position, you do not have to buy to cover all shares. So, if you are short 1,000 shares of a stock, you can buy to cover 400, for example, leaving you short 600 shares.
Limits on Shorting
Because Zolio does not offer a margin or a margin account in the traditional sense, we use an alternative rule to limit traders’ shorting capabilities. There are two important rules to consider.
1. The Short Book or the Long Book cannot exceed 5x capital. This means that the total amount shorted or longed in your account cannot exceed 5x your capital, so any trade that creates that situation will be rejected. If your account has $1 million, for instance, you cannot be short more than $5 million in equities in total.
2. You will be sent a warning email if the value of your account reaches a drawdown of 65% of your starting capital (this is true regardless of reached via a short or a long trade). In other words, if ever your account falls to $350,000, you will be sent a warning email. Zolio does not lock you out of your account, but we suggest you take time away to consider your next steps, including your drawdown and trading plans.
When shorting, it’s important to consider how much risk you are willing to undertake and how much of your capital you still want free for other investments. With these considerations in mind, the ability to short on Zolio allows you to explore different investment strategies, such as long-short portfolios and short hedging.