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 make money from a company's misfortune.

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.

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

You need to follow the below step-by-step process if you want to short a stock in Australia:

Step 1: Join A Trading Platform That Offers Short Selling

Do some research to find a broker that facilitates short selling.

We recommend the best broker for Australia and worldwide, eToro - You can create an eToro trading account HERE.

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).

Step 2: 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 3: 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 4: 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 5: 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.

5. How Do You Borrow Shares To Short Sell?

You can do it in two ways:

• Through online share trading platforms (Contracts for difference or Options trading)

• Taking advantage of the services of an investment fund. 

6. 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, traders want to know which broker is best for shorting. 

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

eToro - Short Selling Platform (Our Recommendation)

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• IG Markets

• PepperStone

• CMC Markets

7. What Are The Disadvantages Of Shorting A Stock?

Short selling is the opposite of a traditional "long" strategy, where stock gains can be infinite, and the total loss is limited to the initial investment amount.

On the other hand, short-sell losses can be infinite as the price of any asset can rise to almost any point. The penalty for short selling is that your losses can be limitless. You can lose much more than your investment.

As there is no upper limit to how high a stock price can rise, you might need help to cover the losses.

If you incur massive losses, your broker could invoke a "margin call", where you are forced to close your short position unexpectedly by repurchasing the shares at the worst possible time. Your trade remains open until you buy back the original shares you borrowed.

Short selling may involve Regulatory Risks wherein Regulators occasionally impose bans on short sales in the broad market or in a specific sector to avoid fear and unnecessary selling pressure.

8. Comparison Of Online CFD And Options Brokers

9. Frequently Asked Questions (FAQs)

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 the online broker T.D. Ameritrade 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.

How Much Money Do I 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.

With the T.D. Ameritrade margin account, you need to fund it with a minimum balance of 2,000 dollars to short-sell a stock. The amount safeguards the broker against losses the trader incurs if his short sale doesn't go in his favour.

What Is The Best Way 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.

Alternative Methods of Short-Selling Stocks Are:

• Spread betting 

• Options trading

• CFD trading

Here Are Some Tips That Can Help You Have a Higher Chance of Success in Short Selling:

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

• When you 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."

What Are The Most Shorted Stocks On The ASX?

Here is the list of the top shorted stocks on ASX:

• Flight Centre Travel Group Ltd (FLT)

• Betmakers Technology Group Ltd (BET)

• Lake Resources N.L.(LKE)

• Regis Resources Limited (RRL)

• Block Inc (SQ2)

• Megaport Ltd (MP1)

• Inghams Group Ltd (ING)

• EML Payments (EML)

• ZIP Co Ltd (ZIP)

• Nanosonics Ltd (NAN)

• Breville Group Ltd (BRG)

• De Grey Mining Ltd (DEG)

• Polynovo Ltd (PNV)

• Magellan Financial Group Ltd (MFG)

• 92 Energy Ltd (92E)

• Kogan.com Ltd (KGN)

• Idp Education Ltd (IEL)

Is Short Selling Allowed On ASX?

Short selling on ASIC is allowed as it brings price efficiency and provides liquidity into the market.

However, in 2008, ASIC placed strict measures on "naked short selling" and "covered short selling" to bring order to the market turmoil. It has resulted in reduced liquidity and volatility in the market.

A limited number of ASX companies are permitted to be sold short. Click here to find the list of approved companies, along with the collateral requirements.

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 To Short Stocks On Robinhood?

Robinhood is a free trading platform that comes with many limitations. Since it doesn't permit short selling, you can't short stocks at a higher price, repurchase them at a lower price and book a profit.

How To Short A Stock On Td Ameritrade?

If you have enough money to trade with your margin account, follow the below steps to short-sell via the T.D. Ameritrade platform.

Note: You can't short-sell penny or OTCBB stocks on this platform. Also, you can't reserve shares for shorting later. 

1. Open an account with T.D. Ameritrade and enable the Margin Trading feature to short-sell. It may take three business days for the team to review your account to ensure it qualifies for shorting a stock.

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

3. Fund your trading account with a minimum balance of 2,000 dollars to short-sell a stock within a T.D. Ameritrade margin account. It covers your losses if your short sale goes against your speculation.

How To Short A Stock On Fidelity?

The first and foremost requisite to short a stock is to have a margin trading account.

The value of the stock you short will be considered a margin loan. Traders have to pay interest on the borrowed amount. Thus, to short a stock on fidelity, you must have adequate margin capacity to support the loan.

Its uptick rule restricts traders from short-selling a stock that has dropped over 10% in a single trading day. Thus, Short sellers must know these requirements and conditions before they place a short stock order on this platform.

What Are The 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?

Once you understand how to short-sell a stock, you will need an app. Here we have discussed some popularly used apps to short stocks in Australia.

eToro CFD App (With over 5 million users, it is the largest ASIC-regulated trading platform in the world. The app is ideal for those who need more time. 

• CMC Short Selling App 

• City Index CFD App

• Saxo Capital Markets CFD App

• Go Markets CFD App

• I.C. Markets CFD App

• IG CFD App

• ThinkMarkets CFD App 

• AvaTrade CFD App 

• Capital.com CFD App

• Plus500 CFD App

• Vantage CFD App

10. Conclusion

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

However, it mostly suits only expert investors due to the risks of losing "infinite" capital and being caught in a short squeeze. Thus, use it economically and only after carefully assessing the risks involved.

If you don't have a trading account to short-sell stocks yet, we recommend the best broker for Australia and worldwide, eToro - You can create an eToro trading account HERE.

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