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. When short selling a stock, how long does a short seller have before covering?

    There are no general rules regarding how long a short sale can last before being closed out. A short sale is a transaction ... Read Answer >>
  2. Can you short sell stocks that are trading below $5? My broker says that I can't.

    Short selling can be very risky for both the investor and the broker. Brokers will often tell investors that only stocks ... Read Answer >>
  3. What is the difference between a short position and a short sale?

    Learn how short selling and short positioning are different, specifically in regards to the nature of the commodity being ... Read Answer >>
  4. How long can a trader keep a short position?

    Learn whether there are any limitations on how long may an investor hold a short position, and explore the costs associated ... Read Answer >>
  5. What are the minimum margin requirements for a short sale account?

    In a short sale transaction, the investor borrows shares and sells them on the market in the hope that the share price will ... Read Answer >>
  6. What percentage of a company's float can be shorted?

    The quick answer is that the amount of shares shorted can actually exceed 50% of the float in a company. The percentage of ... Read Answer >>
Related Articles
  1. Investing

    The Basics Of Short Selling

    Short sellers enable the markets to function smoothly by providing liquidity, and also serve as a restraining influence on investors’ over-exuberance.
  2. Investing

    Why Short Sales Are Not For Sissies

    Short selling has a number of risks that make it highly unsuitable for the novice investor.
  3. Investing

    Short Selling Risk Can Be Similar To Buying Long

    If more people understood short selling, it would invoke less fear, which could lead to a more balanced market.
  4. Trading

    Short Interest: What It Tells Us

    Whether you agree with the overall sentiment or not, short interest is a data point worth adding to you overall analysis of a stock.
  5. Financial Advisor

    The 5 Most Shorted NYSE Stocks (VALE, CHK)

    Understand what a short sale is and why people would want to initiate a short strategy. Learn about the top five most shorted stocks on the NYSE.
  6. Investing

    Short Interest: What It Tells Us

    A stock’s short interest is the total number of shares that investors have sold short but have yet to close.
RELATED TERMS
  1. Days To Cover

    A measurement of a company's issued shares that are currently ...
  2. Short Interest

    The quantity of stock shares that investors have sold short but ...
  3. Weak Shorts

    Traders or investors who hold a short position in a stock or ...
  4. Buy To Cover

    A buy order made on a stock or other listed security that closes ...
  5. Short Interest Ratio

    A sentiment indicator that is derived by dividing the short interest ...
  6. Order

    An investor's instructions to a broker or brokerage firm to purchase ...
Hot Definitions
  1. Time In Force

    Time in force is a special instruction used when placing a trade to indicate how long an order will remain active before ...
  2. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  3. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  4. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  5. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  6. Solvency

    The ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business, but a ...
Trading Center