How to short sell
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10/1077% of retail CFD accounts lose money.
The following page explains the key information you need to know before you engage in short selling. If you aren’t already familiar with shorting, we recommend checking out our invest page, which works through the concept in detail to help you establish a strong foundation of knowledge.
Compare the best short selling platforms
Before you start shorting, we recommend signing up to a trading platform that is equipped with the useful tools and low fees you will want when implementing this new strategy. Simply click on one of the links in the table below to get started.
77% of retail CFD accounts lose money.
How to short sell – a step-by-step guide
There are two distinctly different ways you can engage in short selling, and both involve signing up to a suitable broker. One method involves using a margin account, while the other involves using derivatives in the form of CFDs or spread betting (which are slightly different financial instruments).
We outline the key differences between margin accounts and derivatives later on, but for all intents and purposes, they allow you to do exactly the same thing: speculate on an asset falling in value.
The following list explains the steps you need to take to short sell effectively.
- Choose between a margin account and derivatives. Both of these methods can be effective and each has distinct advantages. Make sure you consider them before making a decision.
- Sign up to a reliable broker. Most modern brokerages offer both margin accounts and derivatives trading. Our table above features platforms that provide both these services, but if you would rather look elsewhere, check out our reviews for alternatives.
- Choose an asset you want to short. You need to conduct both fundamental analysis on an asset that you believe will fall in value, and technical analysis on the broader market to identify trends, as both of these things will be key factors in an asset’s price behaviour.
- Allocate your budget (and stick to it). While you aren’t buying anything outright when shorting, your capital is still at risk. Before short selling, make sure you have a clear understanding of your exposure to risk and the amount of capital you have on the line.
- Set a timeframe. Decide how long you want to have a short position open for. You can’t short an asset forever, and your decision will also be influenced by the borrowing fees you are potentially incurring. This will also likely be influential in your choice between margin trading and derivatives.
- Start shorting. Once you have opened your chosen account, finished your research and are happy with your chosen asset, planned time frame and allotted budget, it is time to start shorting.
What is short selling?
Short selling is investing in the belief that an asset will fall in value. This is either achieved by selling a loaned stock and repurchasing it at a lower price or creating a contract to speculate on the value of an asset falling. Either way, the key thing you need to note is that you are making money by speculating on an asset’s declining price.
Traditional short selling is the process of borrowing shares from a stockbroker that you believe will fall in value, selling them into the market, and then waiting for them to fall in value. Then, you repurchase them, return them to the broker, and pocket the difference in price between what you sold them for, and what you paid for them.
Shorting is now a practice that is performed on all manner of assets such as cryptocurrencies, forex and commodities. CFDs and spread betting have made it more accessible, and they involve taking a contractual ‘bet’ that a stock will fall in value rather than having to go through the process of borrowing.
Key factors to consider
Before making any investment, it is important to consider the different variables that can affect it. Here are some of the key factors you should consider before engaging in shorting.
Margin account vs derivatives
Both strategies have advantages and disadvantages. If you are a long-term investor, margin accounts can be beneficial because they allow you to continue earning dividends on stocks, whereas derivatives merely represent an asset, so dividends are not earnable.
However, because margin trading involves borrowing, significant loan fees are likely to be incurred. By contrast, if you are a short-term trader, derivatives like CFDs and spread betting can offer low trading fees with no borrowing, making them more suitable for regular transactions.
Lastly, there are significant barriers to entry for margin accounts, and they generally require you to have plenty of capital to use as collateral for your investments. By contrast, derivatives are accessible to all, providing ease of use and flexibility with no capital requirements.
Trading fees
This largely depends on how frequently you plan on opening and closing positions. If you plan on holding a long-term short position, trading fees are unlikely to have a major impact given they will be levied infrequently.
Conversely, for regular traders, it is important to try to minimise these fees via broker and account type selection. Our table above features brokers with some of the lowest fees around, so they are a good place to start.
Many brokers charge commission in the form of a spread: the difference between what you can buy an asset for and what you can sell it for via the platform. These fees should be outlined in an easily accessible location on your chosen trading platform.
Should you use leverage?
Leverage is especially popular in derivatives trading, and it is the practice of using debt in the form of borrowed funds to increase the size of an investment. Some brokers even offer leverage up to 150X, though this is extremely risky.
While leverage can increase your exposure to a good trade, it can also maximise your vulnerability to adverse market movements. As a result, it is best for leverage to only be used by experienced traders.
Why should I short sell?
If you believe an asset is going to fall in value based on market sentiment, the latest news, or fundamental factors, shorting can be a great way to gain positive exposure to its falling price.
In addition, if your investment portfolio is heavily weighted in the long direction – the belief that assets will rise in value – adding a short component can help balance your portfolio, mitigating the impact of unexpected market movements.
Moreover, if you are a contrarian by nature, and you like to go against the grain, shorting can be an effective means of opposing the market status quo. This is a strategy employed by some of the world’s most successful investors, such as Warren Buffet, and it can position you well ahead of a flip to an asset’s behaviour and the dawn of a new cycle.
Still undecided?
If you still aren’t sure whether short selling is the right strategy for you, check out our pros and cons section below for an outline of the advantages and disadvantages.
Pros
- Provides the ability to generate returns during a bear market, or when an asset falls in value
- Using derivatives, you can short nearly everything, including cryptocurrencies, forex and commodities
- Allows you to hedge your portfolio – not all of your capital is dedicated to an upwards price trajectory
- Creates market liquidity for an asset and is an important part of overall market dynamics
- Allows you to make substantive, risk-adjusted returns
Cons
Where can I learn more?
If you want to begin shorting to kickstart your learning with some first-hand experience, choose one of our recommended brokers and sign up. Otherwise, check out the sidebar at the top of this page to learn about alternative investing options.
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