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Day Trading/Shorting penny stocks
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Question
Are professional traders/brokers allowed to short penny stocks? I know I'm not allowed to take a short position on a penny stock. Is anybody allowed?
Jerry,
Sure, shorting penny stocks is allowable. The question is, what kind of shorting is allowable? Legally, you must first borrow shares to be able to short them since you need to be able to deliver the shares whenever you sell. Shorting without actually borrowing the shares is called naked shorting and is technically illegal. I say "technically" because, as a practice, naked shorting happens often and is, for the most part, overlooked by regulatory agencies. It has lately been a topic of controversy however.
The issue with penny stocks is that procuring borrowed shares can be very difficult. So that in itself makes shorting unavailable with many penny stocks (usually a broker will not allow such shorting to retail clients if the broker does not carry inventory of those stocks). Nevertheless, naked shorting still happens on more actively traded penny stocks. So while illegal, I guess it depends on your definition of "allowable."
Best regards,
Ren Richardson
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Ren Richardson
Expertise
Most questions regarding the essential and complex elements of the stock, option, and currency markets; many questions regarding technical analysis; questions pertaining to day, swing, and position trading and especially to trading psychology.
Experience
I have worked for over nine years in the trading industry, starting as a research analyst for an equity hedge fund and as a financial advisor for Prudential Securities where I received my Series 7, 6, and 63 licenses. For over four years I also worked for Investools (NASD: SWIM) as a mentor to hundreds of individual traders, training them in all aspects of successful investing and trading. I was also a national instructor for Investools, BusinessWeek Investor Education, and CNBC University, conducting educational workshops across the country on the proper methods of investing. I created the live 3 and 4 day courses for these companies that have become two of their most popular programs with their students. I recently authored several instructional manuals for True North Academy, the company that conducts personal coaching for WizeTrade, Optionetics, and OptionsXpress. I am currently a principal for Bridge Asset Management LLC, a money management firm that specializes in proprietary currency trading.
Organizations
My company is in the process of becoming a member of the NFA (National Futures Association).
Publications
On the Investools, BusinessWeek Investor Education, and CNBC University websites; in the manuals for the live courses for these companies as well as the manuals for the coaching programs for WizeTrade and Stock Investor; in the monthly newsletters of Bridge Asset Management.
Education/Credentials
I received my Bachelors of Science in Economics from Brigham Young University. I earned my NASD Series 7, 6, and 63 licenses and am currently in the process of becoming a CTA (Commodity Trading Advisor).
Awards and Honors
I received the Top Performer award for the Northwest region in my training with Prudential Securities; I was the only mentor out of over 100 mentors to be selected as a national instructor for Investools Investor Education.
Past/Present Clients
With my original hedge fund, our clients were the founders of Franklin Covey as well as several other high net worth company founders. With Investools and True North, my clients were thousands of students from every walk of life and from various levels of knowledge and expertise in investing. My current clients with Bridge Asset Management are individual investors and several professional money managers.
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