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Re: bigt0689 post# 2527

Saturday, 02/25/2012 3:02:26 PM

Saturday, February 25, 2012 3:02:26 PM

Post# of 6233
First off, you can forget about both borrowing money on margin and shorting for penny stocks on Etrade. Etrade will not let you borrow money on margin for penny stocks with an account of 2k nor will they allow you to short penny stocks. Some people claim that brokers don't allow you to use margin for any penny stocks. I can tell you that years ago I bought penny stocks on margin (borrowed money), BUT I also had over 20k in equity of blue chip stocks in my account and this is why I think they allowed me to do it.

Now, let me explain how the margin account works because I don't think you are understanding it correctly. Your account will have a CASH balance. That cash balance is what will be used for your trading (same way it does with the cash account). Anything you trade beyond that amount will be on margin. So, say you have 5k in your account. You want to buy 1k shares of a stock that is trading at 8 bucks. 8 x 1000 = 8000
So you need 8k but you only have 5k cash in your account. When you make the trade your cash account will now total a negative 3k. That amount will change each time you trade. If you sell something else and say the gross proceeds equal 2k, your account balance would now be a negative 1k. Or if you sold something with gross proceeds of say 5k, your balance would then be positive again at 2k. It is basically a credit/debit process. If you go beyond your cash balance you go into the negative. The fee for the interest they charge you for borrowing those funds you don't have gets charged at the end of the month.

As far as shorting I think you have that a bit confused too. You don't put a short order in for any price. What you are basically doing when you short is you are selling a position you don't own at a certain price - you are borrowing the shares from your broker - you have to return the shares to your broker and you are hoping the stock goes down so when you return them they are cheaper. So say you short a stock at $10 for 1k shares - that's 10k you are short. So you want that stock to go down so that when you cover (return the borrowed shares) the price is less and you pocket the difference. If the stock goes down 2 bucks and you cover you are returning 8k instead of the 10k you borrowed - you get to keep the 2k.

So, once again, I doubt Etrade will let you margin or short penny stocks. But I do suggest that you get margin account anyhow because you will avoid the t+3 settlement rule. Even if you buy something with your own cash, if you have a margin account you don't have to wait 3 days for the proceeds to settle before using them again. But you do have to make sure you don't pattern day trade (4 or more daytrades in a 5 day period)if you have under 25k.

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