Ask Colin

My broker has a minimum of $7,000-8,000 trade size plus 1% brokerage plus $40 location fee on short sales. I have only $20,000, so it upsets my money management. Can you suggest an alternative?

I think most brokers either refuse to do short trades for small clients or have conditions like you describe, because the short selling procedure is more complicated than a simple purchase, so it takes time, which costs money. See the article on my web site for an explanation of the process. The broker needs to be paid for their effort, just like everyone else in the economy.

The problem is not the broker's conditions, but your limited capital. You cannot safely trade on the long side with $20,000. You need more like $50,000 - 100,000 to get your risk to manageable proportions. So, when it comes to short selling the game is even more biassed against you.

You could argue that the broker should not let you trade, but that is unreasonable, because some other broker will let you destroy yourself if you want to. This is one of the ethical challenges that would stop me ever working as a broker.

All that said, it is possible to trade on $20,000, but you must realise that you cannot do so with reasonable risk and the odds that you will bust out are high. You need to trade very cautiously - pick only the best trades where you can set a close stop-loss based on technical analysis. If you cannot do this, let the trade pass. Leave short selling to the bigger traders until you build up your capital by playing the long side.

You could try shorting using CFDs. However, I would caution you strongly against doing this until you have a good track record of trading actual stocks on the long side without leverage for a couple of years and through a complete cycle if possible. CFDs are very dangerous and especially unsuitable for inexperienced traders. I have never met a successful CFD trader, but heard countless sad stories from them.

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