How To Short A Stock In Australia: (ASX) Short Selling Explained

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People want to know how to short stocks on the ASX in Australia.

 

In most investment trading strategies, you make profits when the market moves up. Short selling is the opposite. 

 

You make money when the value of the stock or other security declines. It is an advanced trading strategy experienced investors and traders use to profit from a company's misfortune.

 

However, short selling comes with many risks. Short sellers could lose more money than they have invested and potentially incur unlimited losses. Therefore, you must be aware of the risks before using this method. It is only recommended for experienced traders.

 

In this blog, learn about what short selling is, who does it, how it works, the benefits and risks, the best brokers offering this service, and the steps to execute short-selling in Australia.

 

If you don't have a trading account yet, consider eToro, which is used by many investors in Australia and worldwide. You can create an eToro trading account HERE.

 

(eToro AUS Capital Ltd ACN 612 791 803 AFSL 491139. OTC Derivatives are speculative and leveraged. Not suitable for all investors. Capital at risk. See PDS and TMD)

 

Buy Australian & international shares with unlimited commission-free trades. (No brokerage). Other fees may apply. It offers extensive trading features, social trading tools, and copy trading to imitate the trades of other famous traders.

 

 

 

1. What Is Short Selling?

 

Short selling is an investment strategy where you make money when the stock's value decreases. 

 

Large investment firms, hedge fund managers, institutional investors, and portfolio managers use it to hedge against the risks of a market recession.

 

The main objective of shorting a stock is speculating on overvalued companies, a shrinking sector, an overhyped business, a falling market, or companies with a prolonged share price run-up.

 

In the Short Selling strategy, the trader borrows the stock from a broker and sells it at the current market price. He repurchases the stock when its price decreases. The difference between the sell and buy price is the profit from the trade.

 

 

2. How Does Short-Selling Work?

 

You speculate that the stock price will decline, and with this belief, you borrow shares from a broker and sell them at the current market price.

 

After the stock price declines in your favour, you repurchase them and give the stocks back to the lender. As you don't own the shares, you must pay the broker interest on the borrowed amount of money.
 

The loan owing from the broker closes when you repurchase the borrowed shares. (Returning them back to the lender)

 

The difference between the selling price (when you borrow the shares from the broker and sell them) and the buy price (when you buy them back) is the short seller's profit.

 

 

Let's Understand The Concept Through a Stock Shorting Example:

 

The below short-selling example will help you understand how you profit from short-selling.

 

Here, you borrow 10 x shares of CSL company for $300 each. You sell them at the current market price ($300 x 10 = $3,000). By the end of the day, the stock price decreased to $280. This means the cost of 10 x CSL shares is now $2800.

 

You buy them at this price and make a profit of $3000 - $2800 - (stock borrowing costs, trade fees, and margin interest).

 

After deducting the cost from the profit, you still made a nice gain.

 

 

 

3. Why Do You Short Sell A Stock?

 

There are mainly two reasons that compel people to use this strategy to make gains in the market:

 

  • Shorting as a hedge, such as a long position.

  • Making money in the falling markets.

 

 

4. What Are The Risks Of Shorting A Stock?

 

Short selling is the opposite of the usual way people invest in stocks. In regular investing, your potential profits can be unlimited, but your losses are limited to what you initially invested.

 

With short selling, it's the other way around. Your potential losses can be unlimited because stock prices can keep going up without a limit. This means you might lose more money than you originally invested. Since stock prices can rise limitless, you might need help covering your losses.

 

If you lose a lot of money, your broker might make you do something called a 'margin call.' This means you have to quickly close your short position by buying back the shares when it might not be a good time to do it.

 

There's also another risk with short selling. Sometimes, the people who make the rules for stock trading (regulators) can stop or limit short selling in the whole stock market or specific areas to prevent people from panicking and selling too much."

 

 

5. Steps To Short Sell A Stock In Australia on The ASX

 

To short a stock in Australia, follow these steps below:

 

 

Step 1: Understand The Risk (Very Important)

 

When you short-sell, your potential losses are theoretically limitless.

 

If the stock price keeps rising, you could lose more money than you initially invested.

 

Only when you have understood this, follow with the next step.

 

 

Step 2: Join A Trading Platform That Offers Short Selling

 

Once you understand the risk, research to find a suitable broker offering short selling.

 

If you don't have a trading account yet, consider eToro, which is used by many investors in Australia and worldwide. You can create an eToro trading account HERE.

 

(eToro AUS Capital Ltd ACN 612 791 803 AFSL 491139. OTC Derivatives are speculative and leveraged. Not suitable for all investors. Capital at risk. See PDS and TMD)

 

The trading platform offers extensive trading features, social trading tools, and copy trading to imitate the trades of other famous traders. 

 

Buy Australian & international shares with unlimited commission-free trades. (No brokerage). Other fees may apply.

 

 

 

Step 3: Find A Stock That You Wish To Sell Short

 

Ensure you have a margin account with the broker and permission to open a short position in a stock.

 

 

Step 4: Place Your Short Order For a Fair Number of Shares

 

The broker will lend you the desired number of shares and open a position to sell them on the market on your behalf.'

 

The shares borrowed are under a contractual lending arrangement.

 

 

Step 5: Track The Price of The Borrowed Stocks

 

You must follow the price of the stocks you have shorted to know when to repurchase them, either with a profit or loss.

 

It is essential as you could incur high losses if you're not monitoring the stock price action.

 

 

Step 6: Close Your Short Position 

 

When you think you have an excellent risk-to-reward balance, close the position. 

 

To do this, you need to repurchase the stock you have initially sold and then return the borrowed shares to the person who has lent them to you through your broker.

 

The trading platform will facilitate all of this on the back end. Once you return the stocks, you have either made a profit or a loss.

 

 

6. How Do You Borrow Shares To Short Sell?

 

You can do it in two ways:

 

 

 

 

7. Do You Need A Broker To Short A Stock?

 

The best way to short stocks in Australia is with an online broker. With many online brokers available, traders want to know which broker is best for shorting. 

 

Here is a list of brokers that allow short selling in Australia:

    

  • eToro - (eToro AUS Capital Ltd ACN 612 791 803 AFSL 491139. OTC Derivatives are speculative and leveraged. Not suitable for all investors. Capital at risk. See PDS and TMD)

  • IG Markets

  • PepperStone

  • CMC Markets

 

 

8. Comparison Of Online CFD And Options Brokers

 

AFSL 491139.Capital at risk. See PDS and TMD

 

Broker Min. Opening Deposit Commission - ASX 200 Shares Available Markets
eToro CFD $0 Commission Forex, Shares, Indices, Cryptocurrencies, Commodities, ETFs
Plus500 CFD $200 No commission CFD on Forex, Commodities, Cryptocurrency, Indices, Shares, Options, and ETFs
ThinkMarkets CFD $0 $0 for the standard account Forex, indices, commodities, metals, goldsilver, oil shares CFDs, ETF CFDs, futures
IG CFD Broker $0 0.08% with a $7 minimum Indices, FX, Shares, Commodities, Cryptocurrency, ETPs, Options, Interest Rates, Bonds

 

 

9. How Much Money Do You Need To Short A Stock?

 

To short a stock, you need capital. Short sellers have to open a margin account that enables them to borrow money from a broker using their funds as collateral.

 

Short sellers must meet the minimum maintenance requirement of 25%. You are subjected to a margin call when the account value slips below this. If this happens, the broker will ask you to add more capital or liquidate your short position.

 

If you want to short stocks, consider eToro, which is used by many investors in Australia and worldwide. You can create an eToro trading account HERE.

 

(eToro AUS Capital Ltd ACN 612 791 803 AFSL 491139. OTC Derivatives are speculative and leveraged. Not suitable for all investors. Capital at risk. See PDS and TMD)

 

 

 

10. How Profitable Is Short Selling?

 

Short selling allows traders to profit when the market is declining. Unlike traditional trading, where you "buy low – sell high," short selling starts with a "sell" transaction.

 

It involves opening a short position, buying back the shorted stock later, and closing the trade. Short selling is profitable only when a trader correctly predicts that share prices will fall below the shorted price. In this case, the trader profits from the difference between the buying and selling prices of the stock.

 

However, it's essential to note that short selling can be highly risky and may result in unlimited capital loss if the trade moves against the trader. Short-sellers must use a percentage of the total stock value as collateral in margin trading.

 

When executed carefully, short selling can be cost-effective to hedge long positions in your investment portfolio.

 

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. The above are just some general options for educational purposes. All these options come with risk. This is not financial advice.

 

 

 

11. What Is The Most Popular Way To Short The Market?

 

Short-sellers implement three main strategies to short the stock market. These are:

 

  • Inverse fund or shorting a mutual fund linked to an index. Most retail traders use the simplest strategy to profit from the declining index.

 

  • Short selling an ETF is another way to short the market. Here a trader takes a short position on an index ETF. When the index declines, a fund indexed to it falls, and your short position results in a profit. 

 

  • Another way to short-sell the market is to take a “put” position on the index option or futures contract. When a trader buys a put option, he can (but is not obligated to) sell a security at the strike price any time before a specific date. So, whoever sold you the put option (the writer) will pay you the stick’s strike price at any point before its expiry.

 

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. The above are just some general options for educational purposes. All these options come with risk. This is not financial advice.

 

 

12. How Long Should You Hold a Short Position?

 

trader could hold a short position for as long as they expect to profit from their investment.

 

However, there are other factors that they might need to consider before placing a short-selling trade. These include:

 

  • The borrowing agreement terms and conditions include the interest amount the broker charges on the borrowed loan to your margin account. The longer you hold on to the short trade, the more interest charges you will accrue, which would lessen your net profit.

  • Existing market conditions

  • Your maximum acceptable loss also determines how long you will remain in the trade if the stock value increases rather than decreases. 

  • If you want to hedge your existing long position, you may require holding on to the short position until you maintain an opposing long position or don’t see the possibility of considerable decline in the long position.

 

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. The above are just some general options for educational purposes. All these options come with risk. This is not financial advice.

 

 

 

13.  What Is The Fee For Short Selling?

 

In addition to trading commissions, there are other fees/expenses that you must pay to brokers when Short Selling a stock

 

  • Margin Interest

  • Stock borrowing costs

  • Margin Interest (when trading stocks on margin)

  • Dividends and other related payments. (The short seller must make dividend payments, including fees linked to corporate events like stock splits and spinoffs).

 

For example, the margin fee for an online broker is between 6.25 and 9 per cent, with a base rate of 7.75 per cent. It charges a stock commission fee of $9.99.

 

 

14. Why Is Short Selling Difficult?

 

Here are some of the potential cons of short-selling that make it difficult:

 

  • The shorted stock can rise to infinite levels, leading to unlimited losses. 

  • You need to have a Margin account and fund it (with minimum maintenance requirements) until you hold the stocks. 

  • Wrong timing can make you vulnerable to margin calls, margin interest, and being called away. 

  • Short squeezes - when there is a sudden spike in the shorted-stock price, short-sellers are compelled to cover their short positions at heavy losses.

  • You must pay high short Margin interest on placing short trades using margin. This interest can add up over time, particularly when short positions are kept open over a long duration.

  • Short-selling involves substantial stock borrowing fees. 

  • Short-selling may also involve regulatory risks where regulators may impose bans on short sales within a specific sector or in the broad market to avoid unjustified selling pressure. 

  • Short-sellers must pay for events linked to the shorted stock to the entity from which they borrowed it. It includes dividends, share splits, bonus share issues, spinoffs, etc. 

 

Considering the above risks, beginner investors should refrain from short selling until they gain more trading experience. Doing it through ETFs is relatively safer due to the lower possibilities of a short squeeze.

 

 

 

15. Frequently Asked Questions (FAQs)

 

 

What Are The Different Ways To Short A Stock?

 

The outcome of short selling depends on the method you choose.

 

  • Traditional Short-Selling: This method is via a broker. You borrow shares from someone who owns them and sells them at the current market price. When the share price declines, the investor repurchases them at a lower price and makes a profit from the difference in value.

 

 

 

When Do Traders Like To Short Stocks?

 

  • During a Bear Market (when the market decline is swift, deep, and broad). Many experienced short sellers use multiple technical indicators to confirm the Bearish Trend.

  • When they see signs of economic slowdowns, such as opposing geopolitical developments, like the possibilities of war is an excellent time to short-sell.

  • When they see indications that challenge a business, like increasing costs putting pressure on margins and slow revenue or profit growth.

  • When the stock market approaches new highs or valuations reaches "Elevated Levels."

 

 

Is Short Selling Allowed On ASX?

 

Short selling is permitted because it helps make prices fair and adds trading activity to the market.

 

Nevertheless, in 2008, ASIC (the Australian Securities and Investments Commission) introduced stringent rules for "naked short selling" and "covered short selling" to restore order during market turbulence. This move has led to decreased trading activity and market fluctuations.

 

Only a select group of ASX-listed companies can be shorted. To see the list of approved companies and their collateral requirements, you can click here.

 

 

 

Is Short Selling Legal In Australia?

 

Short selling is legal in Australia, provided short sellers comply with the corporation's laws and regulations.

 

In other words, short sellers who communicate fake information are prohibited from short-selling in Australia.

 

 

Does Commsec Allow Short Selling?

 

The CommSec Share Trading platform doesn't allow traders to short-sell any stocks. However, traders can establish a short exposure to a stock with the help of Exchange Traded Options or Warrants.

 

 

How Can You Short Stocks on eToro?

 

If you understand the risks involved in short selling (unlimited capital loss), follow the below steps to short-sell via the eToro platform.

 

  1. Open an account with eToro

  2. Place an order to short sell order of your choice.

  3. Fund your trading account with the minimum balance to short-sell a stock within an eToro margin account. It covers your losses if your short sale goes against your speculation.

 

(eToro AUS Capital Ltd ACN 612 791 803 AFSL 491139. OTC Derivatives are speculative and leveraged. Not suitable for all investors. Capital at risk. See PDS and TMD)

 

 

 

Who Are The Most Famous Short Sellers Worldwide?

 

Here is the list of the most successful short sellers of all time:

 

  • Steve Eisman

  • Michael Burry

  • Jamie Mai

  • Charlie Ledley

  • Jim Chanos

  • Jacob Little   

 

 

What Apps Let You Short Stocks in Australia?

 

Once you know how to short-sell stocks and the risks involved (like losing a lot of money - unlimited), you can compare different apps below.

 

  • eToro (With over 5 million users, it is the largest ASIC-regulated trading platform in the world. You can crate an account with eToro here.

 

(eToro AUS Capital Ltd ACN 612 791 803 AFSL 491139. OTC Derivatives are speculative and leveraged. Not suitable for all investors. Capital at risk. See PDS and TMD)

 

  • CMC Short Selling App 

  • Saxo Capital Markets CFD App

  • Go Markets CFD App

  • IG CFD App

  • ThinkMarkets CFD App 

  • AvaTrade CFD App 

  • Capital.com CFD App

  • Plus500 CFD App

 

 

 

How Do You Tell If A Stock Is Heavily Shorted?

 

The level of short interest in each ASX stock determines how bearish the stock is. It is published for each stock on the ASX website.

 

A stock with a high short interest (double-digit number between 12 to 15) is ideal for short-selling.

 

It indicates that many people are betting against it, and there are higher chances for the stock price to rise at any instant. You will also see high short-term volatility in such stocks.

 

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. The above are just some general options for educational purposes. All these options come with risk. This is not financial advice.

 

 

How Long Does A Short Squeeze Usually Last?

 

There is no “standard” duration for a short squeeze, as each shorted stock has a distinct level of short interest and a short interest ratio.

 

Usually, short squeezes last between several days and several months.

 

 

How Much Can A Stock Go Up in a Short Squeeze?

 

Estimating potential losses on a short sale can be challenging, and it's essential to recognize that this situation can lead to unlimited losses.

 

Since there is no upper limit on how much a stock's price can increase, there is effectively no cap on how high a stock can go during a short squeeze, potentially resulting in significant and unlimited losses for the short seller.

 

 

What Happens If You Short a Stock and it Goes up?

 

It's tough to predict how much money you might lose in a short sale. And it's crucial to know that this situation can lead to unlimited losses.

 

When a stock experiences a short squeeze, there's no limit to how high its price can go up. This means a short seller can face huge and unlimited losses.

 

 

 

Who Buys Stocks When Everyone is Selling?

 

You might require selling stocks if you:

 

  • Need the money 

  • Your trading goals are met, and you want to exit the trade

  • Want to rebalance your portfolio

  • Your emotions compelled you to leave the trade 

 

As there can be different reasons to sell the stock, different investing goals and investment plans can make people willing to buy the stock.

 

Institutions, corporate traders, individual traders, and market makers/specialists have different motivations and actions behind buying the stock. These include:

 

  • They are day-trading stocks 

  • They have regularly scheduled investments to save for retirement, etc.

  • They are swing traders

  • They are buying the dip 

  • They are covering short sales

  • They have limited buy orders

  • They are rebalancing their portfolio 

  • They are exercising an option

  • They have the fear of missing out on a profitable trading opportunity

 

 

 

When Do You Have To Pay Back A Short?

 

There are no strict rules about how long a short sale can continue.


The entity lending the shares for the short sale can request them back at any time, with minimal notice. However, this rarely happens if the short seller consistently pays their margin interest and meets the margin requirements.

 

Brokerage firms encourage traders to engage in short selling because they earn commissions on these trades. Additionally, brokerage firms face limited risk due to strict margin rules for short sales.

 

However, if the stock being shorted suddenly surges in price, resulting in significant losses and unmet margin requirements, the broker can forcibly close the short position. Typically, the investor closes their position before the broker takes action.

 

 

What Triggers a Short Squeeze?

 

Let's take a closer look at a short squeeze scenario to understand its triggers:

 

You identify an overvalued stock and take a short position.


Contrary to your expectations, the stock price rises, sparking a short squeeze. This increase in stock price can be due to various factors, such as the company reporting positive earnings, favourable news about the stock or its industry, or increased buying interest in the stock.

 

As you realize you can't repurchase the shorted stock at a lower price, you decide to buy replacement shares at a higher cost, resulting in a loss. Alternatively, you might purchase more shares than necessary, hoping to recoup your losses by selling them for a profit.

 

Likewise, most short sellers buy higher-priced shares to close their short positions and incur losses. This market activity further pushes up stock prices, creating a feedback loop where short sellers' losses grow over time.

 

 

 

What Is The Best Indicator For a Short Squeeze?

 

Some of the best signs that indicate a pending short squeeze include:

 

  • Substantial buying pressure causes heavy buying of many shares being sold short.

  • High short interest of 20% or above. 

  • A high Short Interest ratio (SIR), or the number of days short-sellers need to cover their position, is above 10. The higher this number, the more chances of experiencing a short squeeze in the stock. 

  • Relative Strength Index (RSI) less than 30. A stock with a low RSI implies that it is oversold and trading at a low price, possibly indicating a forthcoming price rise. Such a stock is ideal for experiencing a short squeeze.

 

 

What is an Example of a Short Squeeze?

 

A short squeeze involves a sudden increase in purchasing activity among short sellers due to the stock price rise.

 

It causes them to buy it back to exit their short trades and book their losses. This massive increase in buying activity further increases the stock’s price and compels more traders to cover their short positions.

 

 

 

Let us Understand it by a Short-Selling Example:

 

Suppose an XYZ Company has a short interest of 50%. Due to poor earnings, most traders have created a short position from $50, and the present stock’s price is $35.

 

However, the company reports remarkable earnings in the next quarter that causes it to double its price to $70. As most traders have shorted in the company’s stock, they would require to exit from their positions to curtail their losses.

 

When more buyers start buying the stock to cover their position, it will create purchasing pressure. It will, in turn, causes the stock value to increase to $80, making it more problematic for short-sellers.

 

 

What Happens If You Short a Stock and It Goes To Zero?

 

If you sell a stock at a higher price and the price of that stock goes to zero, then it is a great opportunity for a short-seller. However, in this case, the stock (with a zero value) loses its entire value and is suspended.

 

Short-sellers can buy back the stock before it becomes worthless to avoid this. By doing this quickly, they can make a good profit instead of waiting until the stock is worth nothing and gets removed from trading.
 

 

What is The Difference Between a Short Squeeze and a Long Squeeze?

 

Before we understand the difference, let us determine what a squeeze is.

 

It happens in markets wherein speculators trade in heavy volume, and several traders forcibly close their position due to the stock price moving against them.

 

A short squeeze occurs when many investors bet against a stock (or other tradable security), and its price suddenly shoots up, causing them to cover their positions by buying back the shorted stock. This unusual condition triggers a further rise in the stock price as short sellers exit their position to cut their losses.

 

On the contrary, a long squeeze occurs when the asset’s price reduces, and investors with long positions rush to sell out of their positions. This results in a further decline in asset price.

 

 

Other Differences Include:

 

During a long squeeze, the potential losses of a trader are limited to what they paid for the asset. However, investors holding short positions can face limitless losses in a short squeeze.

 

Additionally, a long squeeze has no fundamental basis for selling. It may be very brief or last for some time. It is when value-buyers or short-term traders who wait for oversold conditions buy the stock when its price falls "too low" and bid it back up.

 

A stock with limited shares available to the public is more prone to a long squeeze. It takes fewer people to create a significant impact on the stock price.

 

 

16. Conclusion

 

Short selling can be a lucrative trading strategy to profit when a stock drops in value.

 

However, only expert investors should consider short selling due to the risks of losing "infinite" capital and being caught in a short squeeze. Thus, only try it after carefully assessing the risks involved.

 

If you don't have a trading account yet, consider eToro, which is used by many investors in Australia and worldwide. You can create an eToro trading account HERE.

 

(eToro AUS Capital Ltd ACN 612 791 803 AFSL 491139. OTC Derivatives are speculative and leveraged. Not suitable for all investors. Capital at risk. See PDS and TMD)

 

 

 

The advice and information on OzStudies.com is in general nature and should not be seen as a replacement for independent financial advice. We strongly encourage readers to consult with financial experts regarding their own financial decisions and investments.


Please note that the information presented on OzStudies.com is solely for educational purposes. Every individual's financial situation is unique, and the products and services we mention may not suit everyone. We do not provide financial advice, advisory, or brokerage services nor endorse buying or selling specific stocks or securities. It's essential to know that information might have changed since publication and past performance does not guarantee future results.

 

 

 

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