A:

Put simply, brokerage firms restrict short sales to day orders because of the complexity of the short sale transaction and the difficulty in authorizing shares to be short sold in a rapidly changing environment.

Long-term orders can be placed when an investor is going long because all he or she is doing is buying a security. The long investor's order is placed once the security becomes available or once the conditions of the trade are met. But short sale transactions are more complex. Several extra steps must be taken before the trade becomes effective. A short sale involves the selling of borrowed shares that must first be confirmed to exist. Once this has been established, the shares are sold on the market and the proceeds are deposited in the short seller's account. (To learn more about short sales, see our Short Selling Tutorial.)

It is because of the fluctuations in brokerage inventories that only day orders can be used in short sales. When an investor places a short sale order, the brokerage firm takes the shares out of its inventory or out of a client's margin account, or it borrows shares from another brokerage firm, and then it sells them on the market. However, the constant change in positions in and out of securities by all three of these sources for shares means that the firm must make sure that the shares are available for lending. Once the shares are confirmed and authorized to be short sold, the short sale transaction will be completed. However, if the shares cannot be confirmed within the trading day, the order is canceled and the short seller will have to re-enter the order the next day.

RELATED FAQS
  1. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>
  2. How can an investor profit from a decline in the real estate sector?

    Speculation enables investors to profit from a decline in the real estate sector. The most popular forms of speculation for ... Read Full Answer >>
  3. How can I evaluate if a stock is a short squeeze?

    To evaluate whether a stock is a short squeeze, traders should examine its fundamentals, short interest and price history. ... Read Full Answer >>
  4. What is the difference between a short squeeze and short covering?

    "Short covering" and "short squeeze" are different terms to describe a situation involving short positions. A short squeeze ... Read Full Answer >>
  5. How does days to cover a short position relate to a short squeeze?

    Days to cover a short position reveals the intensity and duration of a potential short squeeze. A short squeeze occurs when ... Read Full Answer >>
  6. What is the difference between speculation and hedging?

    Speculators and hedgers are different terms that describe traders and investors. Speculation involves trying to make a profit ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  2. Trading Strategies

    How To Buy Penny Stocks (While Avoiding Scammers)

    Penny stocks are risky business. If want to trade in them, here's how to preserve your trading capital and even score the occasional winner.
  3. Stock Analysis

    Investors Need to Stop Shorting GoPro. Here's Why

    Discover why investors should stop shorting GoPro. GoPro has been one of the fastest-growing companies since 2005 with many betting against more growth.
  4. Investing Basics

    5 Things to "Deliberately" Do to Improve Your Trading

    Most traders are putting in trading hours, but not improving. Here are deliberate steps that can take your trading to the next level.
  5. Chart Advisor

    Stocks to Short...When the Dust Settles

    Four short trades to consider, but not quite yet. Let the dust settle and wait for a pullback to resistance for a higher probability trade.
  6. Stock Analysis

    3 Reasons to Short Monster Beverage

    Learn why, despite the popular perception of Monster Beverage as a high-growth stock, investors may be better off taking a short position on it.
  7. Trading Strategies

    Are You a Trend Trader or a Swing Trader?

    Swing traders and trend traders execute market timing strategies that require different skill sets.
  8. Investing

    Predictions For The Stock Market

    Learn different choices and strategies that can be used to create a profit regardless of what direction the market is going.
  9. Trading Systems & Software

    Use Price Action Trading Strategy for Results

    Bored by the fixed rules of technical and fundamental analysis? Price action trading allows you to customize your own trading strategy.
  10. Active Trading Fundamentals

    Looking to Go Short on China? Here's How

    Learn how to take short positions on markets in China by investing in long and short exchange-traded funds focusing on the Chinese equities market.
RELATED TERMS
  1. Bear Closing

    Purchasing a security, currency, or commodity in order to close ...
  2. Crowded Short

    A trade on the short side with an overwhelmingly large number ...
  3. Gross Exposure

    The absolute level of a fund's investments.
  4. David Einhorn

    Known for his short selling strategy, activist investor David ...
  5. Forex Spread Betting

    A category of spread betting that involves taking a bet on the ...
  6. Short Call

    A type of strategy regarding a call option, which is a contract ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!