Short selling explained: How to short stocks

A beginner's guide to profitting from falling prices.

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If you're caught up in the unfolding GameStop story, you might be wondering how short selling works and how it's possible for traders to profit from falling stock prices.

Short selling historically gets a bad rap in the investment world because traders are benefiting from a company's loss. And if enough traders or fund managers short a stock, it sends a message to the market which can can result in more selling hence sending prices lower.

However, not everybody believes short selling is bad. One argument is that it keeps the market running efficiently because short-sellers dig out companies that are "overvalued". The strategy can also be used to offset losses during a stock market crash. This can be particularly useful for investors holding a portfolio of dividend shares that they'd prefer not to sell as prices fall.

While it varies from country to country, there are a few different ways to short sell stocks, from borrowing shares from a broker to trading put options and CFDs. We'll give you an overview of what short selling means, how you can do it and the risks involved.

Important: Short selling is a controversial strategy and not everyone thinks it should be allowed. Some countries have banned it entirely. Either way you look at it, short selling is for experienced traders only.

What is short selling?

The idea behind this investment strategy is that if you think a stock's value is going to decrease, you can make money out of it. You borrow the stock from a broker, sell it at the market price, buy it back when the price has decreased, then give the stock back to its legitimate owner and keep the profit.

A quick example: Say you think CSL's stock price is going to fall today. You borrow 10 CSL shares that cost $200 each and sell them at market price ($200 x 10 = $2,000). It turns out that you're right and by the end of the day, they're worth $180 each. So you buy them back for less than you sold them ($180 x 10 = $1,800), then give them back to the broker. You keep the profit, which is $2,000 - $1,800 = $200. Even after the fee that you'll have to pay to the broker for the stocks you borrowed, it's a nice earning.

It sounds easy, but the problem is, things could also go the other way around. If it turns out that you were wrong, and at the end of the day 1 CSL share is worth $210 instead ($210 x 10 = $2,100), you'll lose money ($2,000 - $2,100 = -$100).

Traditional short selling

The traditional means of shorting a stock directly is to contact a full-service broker or a major investment fund such as Morgan Stanley. Full-service brokers usually offer advice alongside trading and they charge a premium price for the service.

In Australia, the service is usually only available to wholesale investors, those that are either professional investors or are investing a minimum of around $500,000.

However, it pays to be aware that since the GFC, the Australian Securities and Investment's Commission (ASIC) has clamped down heavily on short selling, so many brokers no longer offer it as a service. Below is the traditional method for shorting a stock:

  1. Find a broker that offers short selling. Not all brokers will facilitate short selling and not all stocks will be available for borrowing, so you may have to do some research.
  2. Open a position to sell it. It will be bought at the market price and held under a contractual lending arrangement.
  3. Keep an eye on the price. Getting distracted is a bad idea. You need to be able to react quickly if things go wrong.
  4. Buy the stock back when you think it's the right moment. You'll need to find a good risk/reward balance. When things are going well, it's easy to become too greedy and wait too long to buy back.
  5. Give the stock back and keep the profit (or sustain the losses). If the price goes down and you buy back for less, you'll have made money out of your short selling. If the price goes up, you'll lose money instead. Don't forget that the risk is all on you.

The most shorted stocks on the ASX

Short selling through online trading platforms

Many traders prefer to short sell through online share trading platforms. In Australia there are two key ways to do this:

  • Contracts for difference. CFDs are derivative investment products that allow you to speculate on prices without actually owning the shares. This means that CFD traders can profit whether the prices of stocks, commodities or currencies are going up or down. Bear in mind, it pays to be aware that CFDs are complex and risky financial instruments and many investors lose money this way.
  • Options trading. You can purchase an option on a stock that allows you to sell it at the initial market price within the option's expiry date. If the price goes down, you sell, buy back at the new price and make a profit. If the price goes up, you don't sell at all and only lose the value of the option, thus limiting the risk. With traditional short selling, you can buy back whenever you want (unless the owner of the stock claims it back), whereas options normally have a fairly short expiry date.

Risks of short selling a stock

Repeat after us: short selling is for expert investors and you shouldn't do it unless you do know what you're doing.

The reason it's considered so risky is that you could lose "infinite" money. When you buy a share and "go long", the maximum you can lose is the amount you invested. When you "go short" instead, there are no theoretical limits to how much share prices could go up, and thus to how much you could lose.

It's especially dangerous if a lot of people are short selling shares from the same company and the price unexpectedly goes up. At that point, everyone will start buying back quickly, causing the stock to go up even more. It's what's called a "short squeeze" and it easily becomes a vicious cycle that turns out very expensive for short sellers.

Finally, don't forget that short selling isn't free. Brokers will charge a fee for lending stocks, and there are fees for other short selling methods too. Be aware that these will partially lower your gains and increase your losses.

Protecting your portfolio

Say you hold a portfolio of stocks and you predict that a market crash is coming or a company's stock is going to fall. To avoid losses to your portfolio, one option would be to sell the stocks of the companies that you hold before their prices drop – if you can get the timing right.

However, if you hold dividend stocks, you might prefer to keep them for the long run for the income. To avoid your portfolio falling in value (without selling the shares) you could short the stocks through a CFD or put options to the amount you think they will fall – and so offset any losses.

Compare online CFD and options brokers

Name Product Minimum Opening Deposit Minimum Opening Deposit Commission - ASX 200 Shares Available markets Platforms
Vantage FX CFD
$200
$200
$8 AUD or 0.08%
Forex, CFD shares, Indices, Cryptocurrencies, Commodities
MetaTrader 4
MetaTrader 5
TradingView
Disclaimer: CFD Service. Your capital is at risk.
Vantage FX has some of the lowest CFD trading fees in Australia, plus you can place trades and find global trends through the new TradingView charts platform.
eToro CFD
US$200
US$200
No commission
Forex, Shares, Indices, Cryptocurrencies, Commodities, ETFs
eToro Trading Platform
Note: This broker offers CFDs which are volatile investment products and most clients lose money trading CFDs with this provider.
Join the largest social trading network in the world.
Plus500 CFD
$200
$200
No commission
CFD on Forex, Commodities, Cryptocurrency, Indices, Shares, Options and ETF's
Plus500 Trading Platform
Disclaimer: CFD Service. Your capital is at risk.
Trade CFDs on Australian and International shares, indices, cryptocurrencies, commodities and more.
IG CFD broker
$0
$0
0.08% with $7 minimum
Indices, FX, Shares, Commodities, Cryptocurrency, ETPs, Options, Interest Rates, Bonds
MetaTrader 4
ProReal Time
IG Trading Platform and Apps
L2
Disclaimer: CFD Service. Your capital is at risk.
Trade from over 15,000 markets with Australia's leading service for CFD trading and forex.
IC Markets CFD (True ECN Account)
US$200
US$200
0.1% per side
ASX shares, global shares, indices, commodities, forex, cryptocurrencies
MetaTrader 4
MetaTrader 5
cTrader
Disclaimer: CFD Service. Your capital is at risk.
Trade 230+ different products with fast execution under 40 milliseconds on average.
Saxo Capital Markets CFD
3,000
3,000
0.10% with $6 minimum
Indices, FX, Shares & ETFs, Commodities, Cryptocurrencies, Options, Bonds
SaxoTraderGO
SaxoTraderPRO
Disclaimer: CFD Service. Your capital is at risk.
Award-winning trading platfrom with extensive charting tools and reliable execution.
Blueberry Markets CFD Trading
US$100
US$100
$20 per month subscription plus 2% of trade size
Indices, ASX200 Shares, Commodities, Cryptocurrency
MetaTrader 5
Disclaimer: CFD Service. Your capital is at risk.
Bottom of the market fees on forex, CFDs and commodities with 24/7 quality customer service.
CMC Markets
$0
$0
0.09% with a $7 minimum
Forex, Indices, Commodities, Cryptocurrencies, Global shares, ASX shares, Bonds
CMC Next Generation CFD, MetaTrader 4
Disclaimer: CFD Service. Your capital is at risk.
Share CFD and forex ideas with other traders and take your strategy to the next level with over 100 technical indicators and charts on CMC’s mobile-friendly Next Generation platform.
Pepperstone CFD
$200
$200
No commission
ASX shares, global shares, indices, cryptocurrencies, commodities
MetaTrader 4
MetaTrader 5
cTrader
Disclaimer: CFD Service. Your capital is at risk.
Trade stock indices on the global market, via Pepperstone's MetaTrader 4 and cTrader client terminals.
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Compare up to 4 providers

Trading CFDs and forex on leverage is high-risk and you could lose more than your initial investment. It may not be suitable for every investor. Refer to the provider’s PDS and consider the risks before trading.

Name Product Monthly fee Options trading fee Standard brokerage fee
Saxo Capital Markets (Classic account)
$0
$5
AUD $5
Access 19,000+ stocks on 40+ exchanges worldwide
Low fees for Australian and global share trading, no inactivity fees, low currency conversion fee and optimised for mobile.
HSBC Online Share Trading
$0
$30
AUD $19.95
Limited time offer: Get up to $100 in brokerage rebates on your first 5 trades when you sign up to a HSBC Online Share Trading account (T&Cs apply). Make trades online with brokerage fees starting from just $19.95 with an HSBC Online Share Trading account. Plus gain access to complimentary expert research, trading ideas and tools.
Bell Direct Share Trading
$0
$30
AUD $15
Invest in Australian shares, options and managed funds from the one account with no inactivity fee.
Bell Direct offers a one-second placement guarantee on market-to-limit ASX orders or your trade is free, plus enjoy extensive free research reports from top financial experts.
CMC Markets Invest
$0
$33
AUD $11 or 0.1%
$0 brokerage on global shares including US, UK and Japan markets.
Trade up to 9,000 products, including shares, ETFs and managed funds, plus access up to 15 major global and Australian stock exchanges.
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Compare up to 4 providers

Important: Share trading can be financially risky and the value of your investment can go down as well as up. Standard brokerage is the cost to purchase $1,000 or less of equities without any qualifications or special eligibility. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.

Name Product Minimum Opening Deposit Minimum Spreads for Major Currencies Commission Minimum Trade Size Platforms
Vantage FX
AUD 200
0.0 pips - 1.0 pips
$0
0.01 lots
MetaTrader 4
MetaTrader 5
TradingView
Disclaimer: CFD Service. Your capital is at risk.
Spreads start from 0.0 on major currency pairs and you get some of the lowest forex trading fees in Australia. Plus you can place trades and find global trends through the TradingView charts platform.
eToro Forex Trading
USD 200
1.0 pips
$0
US$200 (to CopyTrade)
eToro Trading Platform
Note: This broker offers CFDs which are volatile investment products and most clients lose money trading CFDs with this provider.
Social trading, advanced charting tools, plus receive exclusive benefits through the eToro Club (membership is tiered based on the equity in your trading account).
Plus500 Forex Trading
AUD 200
1.0 pips
$0
N/A
Plus500 Trading Platform
Disclaimer: CFD Service. Your capital is at risk.
Minimum spreads of 0.01% for major currencies. Customers should visit Plus500's website for updated spreads in real time.
Open an account and experience Plus500's easy-to-use proprietary trading platform, 24/7 online chat support and free real-time forex quotes.
IG Forex Trading
0
0.6 - 1.5 pips
$0
1 lot
MetaTrader 4
ProReal Time
IG Trading Platform and Apps
L2
CFD Service. Your capital is at risk.
Choice of trading platforms. Choose optional extras like advanced charting, reporting and order types. Over 90 currency pairs to choose from.
IC Markets Forex Trading (Raw Spread account)
USD 200
From 0.0-0.1 pips
AU$3.50 per 100k traded
0.01 lots
MetaTrader 4
MetaTrader 5
cTrader
CFD Service. Your capital is at risk.
Saxo Forex Trading (Classic Account)
AUD 3,000
0.5 pips
$0
$1000
SaxoTraderGO
SaxoTraderPRO
CFD Service. Your capital is at risk.
Trade majors, minors, exortics, crypto and spot metals on Saxo's award-winning trading platfrom.
Blueberry Markets Forex Trading
USD 100
From 0.0 pips
$0
0.01
MetaTrader4, MetaTrader5
CFD Service. Your capital is at risk.
Bottom of the market fees on forex, CFDs and commodities with 24/7 quality customer service.
CMC Markets
0
0.7 - 1.5 pips
$0
0.01 lots
CFD Next Generation
MetaTrader 4
CFD Service. Your capital is at risk.
Pepperstone Forex Trading (Razor Account)
USD 200
0.0 - 0.1 pips
AU$3.50 per 100k traded
0.01 lots
MetaTrader 4
MetaTrader 5
cTrader
Disclaimer: CFD Service. Your capital is at risk.
Margin FX is a complex financial product and traders are at high-risk of losing all of or more than their initial investment.

Choose from a range of fee-free funding methods, plus a suite of 10 different apps available as part of Pepperstone's Smarter Trading Tools.
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Trading CFDs and forex on leverage is high-risk and you could lose more than your initial investment. It may not be suitable for every investor. Refer to the provider’s PDS and consider the risks before trading.

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Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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