Short selling explained: How to short a stock

A beginner's guide to profitting from falling prices.

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With the COVID-19 pandemic sending stock prices plunging across global markets, it's worth understanding how advanced traders can continue to profit by short selling stocks and indices like the S&P/ASX200.

Short selling historically gets a bad rap in the investment world because traders are benefiting from a company's loss. However, the strategy can also be used to offset your own 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.

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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

Data indicated here is updated regularly
Name Product Minimum Opening Deposit Minimum Opening Deposit Commission - ASX 200 Shares Available markets Platforms
eToro CFD
USD 1,000
USD 1,000
No commission
Forex, Shares, Indices, Cryptocurrencies, Commodities, ETFs
eToro Trading Platform
Disclaimer: Trading CFDs and forex on leverage is high-risk and losses could exceed your deposits.
Join the largest social trading network in the world.
Plus500 CFD
AUD 100
100
No commission
CFD on Forex, Commodities, Cryptocurrency, Indices, Shares, Options and ETF's
Plus500 Trading Platform
Disclaimer: Trading CFDs and forex on leverage is high-risk and losses could exceed your deposits.
Finder exclusive offer: Open a new trading account and receive a welcome bonus of AU$110 when you deposit your first $370 and enter the bonus code “Special200”. T&C’s apply.
Trade CFDs on Australian and International shares, indices, cryptocurrencies, commodities and more.
IG CFD broker
AUD 0
0
0.08% with $7 minimum
Indices, FX, Shares, Commodities, Cryptocurrency, ETPs
MetaTrader 4
ProReal Time
IG Trading Platform
Disclaimer: Trading CFDs and forex on leverage is high-risk and losses could exceed your deposits.
Introductory offer: Build confidence by trading at lower minimum trade sizes for the first six weeks. Plus, receive a reduced commission on Australian shares CFDs. T&C's apply.
Trade from over 15,000 markets with Australia's leading service for CFD trading and forex.
IC Markets CFD (True ECN Account)
$200
$200
0.1% per side
ASX shares, global shares, indices, commodities, forex, cryptocurrencies
MetaTrader 4
MetaTrader 5
cTrader
Disclaimer: Trading CFDs and forex on leverage is high-risk and losses could exceed your deposits.
Trade 230+ different products with fast execution under 40 milliseconds on average.
City Index CFD
AUD 0
0
0.08% with $5 minimum
ASX shares, 4,500 global shares, indices
MetaTrader 4
At Pro
Advantage Web
Disclaimer: Trading CFDs and forex on leverage is high-risk and losses could exceed your deposits.
Trade CFDs on indices, FX, global & Australian shares and commodities, plus access other markets such as metals, bonds and interest rates.
Blueberry Markets CFD Trading
$100
$100
$20 per month subscription plus 2% of trade size
Indices, ASX200 Shares, Commodities, Cryptocurrency
MetaTrader 5
Disclaimer: Trading CFDs and forex on leverage is high-risk and losses could exceed your deposits.
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
ASX shares, 25+ global exchanges, treasuries, indices
CMC Next Generation CFD, MetaTrader 4
Disclaimer: Trading CFDs and forex on leverage is high-risk and losses could exceed your deposits.
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
USD 200
200
No commission
ASX shares, global shares, indices, cryptocurrencies, commodities
MetaTrader 4
MetaTrader 5
cTrader
Disclaimer: Trading CFDs and forex on leverage is high-risk and losses could exceed your deposits.
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.

Data indicated here is updated regularly
Name Product Monthly fee Options trading fee Standard brokerage fee
CMC Markets Options Trading
$0
$33 up to $10,000, 0.33% above $10,000
AUD 11 or 0.1% for first 10 trades up to AUD 10,000
Bell Direct Options Trading
$0
$30
AUD 15 for first 10 trades
loading

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” fee is the cost to trade $1,000 or less of ASX-listed shares and ETFs without any qualifications or special eligibility. If ASX shares aren’t available, the fee shown is for US shares. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.

Data indicated here is updated regularly
Name Product Minimum Opening Deposit Minimum Spreads for Major Currencies Commission Minimum Trade Size Platforms
eToro Forex Trading
USD 1,000
1.0 pips
$0
US$200 (to CopyTrade)
eToro Trading Platform
Margin FX is a complex financial product and traders are at high-risk of losing all of or more than their initial investment.
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 100
0.7 - 3.0 pips
$0
0.01 lots
Plus500 Trading Platform
Trading CFDs and forex on leverage is high-risk and losses could exceed your deposits.
Finder exclusive offer: Open a new trading account and receive a welcome bonus of AU$110 when you deposit your first $370 and enter the bonus code “Special200”. T&C’s apply.
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
AUD 0
0.6 - 1.5 pips
$0
1 lot
MetaTrader 4
ProReal Time
IG Trading Platform
Trading CFDs and forex on leverage is high-risk and losses could exceed your deposits.
Introductory offer: For the first two weeks of trading, take advantage of IG's lower minimum trade sizes to help you build confidence.
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
Trading CFDs and forex on leverage is high-risk and losses could exceed your deposits.
Citi Foreign Exchange Services
AUD $0
0.5 to 1.5
$0
US$20,000
Desktop / Relationship Manager
Invest directly in hundreds of global currencies with help from experienced forex brokers.
Note: Citi is not a CFD provider.
City Index Forex Trading
AUD 0
0.5 - 1.22 pips
$0
0.01 lots
MetaTrader 4
At Pro
Advantage Web
Trading CFDs and forex on leverage is high-risk and not suitable for all investors and you could lose your initial investment. Always check the provider’s PDS and consider the risks before trading.
Choice of trading platforms, integrated Reuters news and device-synching so you can monitor trades across multiple devices.
Blueberry Markets Forex Trading
$100
From 0.0 pips
$0
0.01
MetaTrader4, MetaTrader5
Trading CFDs and forex on leverage is high-risk and losses could exceed your deposits.
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
Trading CFDs and forex on leverage is high-risk and losses could exceed your deposits.
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
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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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.

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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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