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.
Do you want to know more about the Short-Selling trading strategy? Then keep reading 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.
1. What Is Short Selling?
Short Selling is an investment strategy where you make money when the stock's value decreases. This technique is only available to selected ASX retail investors. 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.
Let us understand the concept through a shorting of a stock 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 current market price ($300 x 10 = $3,000).
By the end of the day, the price of each stock came down to $280. It means the actual worth 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 profit.
2. How Does Short-Selling Work?
In Short Selling, you speculate that the stock price will decline at the end of the trading day. With this belief, you borrow that shares from a broker and sell them at the current market price.
After the stock price declines in your favour, you buy them after the price depreciates. As you don’t own the shares, you need to pay interest to the broker on the borrowed amount. The loan owing from the broker closes when you repurchase the borrowed shares.
3. Why Should 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 hedging a long position, which can lock in gains.
Make money in the falling markets.
4. What Is The Penalty For Short Selling?
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 find it challenging 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 number of 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.
7. How Do You Borrow Shares To Short Sell?
In Australia, the short-sell service is only available to wholesale investors, professional investors, or investors investing at least $500,000.
You can do it in two ways:
Taking advantage of the services of an investment fund.
8. How Do You Short A Stock Step By Step?
To use a short-selling strategy, you need to follow the below step-by-step process:
Do some research to find a broker that facilitates short selling.
Next, find the stock that you wish to sell short. Ensure you have a margin account with the broker and the required permission to open a short position in a stock.
Place your short order for a suitable 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 will be held under a contractual lending arrangement.
Track the price of the borrowed stocks.
Close your short position when you think you are getting a good risk-to-reward balance. 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. Return the stock and retain the profit or sustain the losses.
5. Do You Need A Broker To Short A Stock?
The best way to short stocks in Australia is with an online broker. With many brokers available online, traders ask what broker is best for shorting. Here is the list of top brokers that allow short selling in Australia:
2nd popular App after Robinhood
Regulated trading platform
Zero-commission (no ticketing fees, stamp duty, markup costs, and management fees)
Min account funds: $10
No deposit fee
Fee for $15k Trade: $22.50
Charges an Ongoing fee
Max Leverage: 1:30
Indexes available: 13
Copy Trader, and Smart Portfolio features
Instant App notifications, and social news updates
Facility to trade with Live Prices
Highly recognized platform with over 200,000 active users
Inactivity fee: Yes (along with commissions)
Min account balance: $250
Leverage: 1:30 standard
Trade across 1250 assets comprising EFTs, forex, penny, CFDs, and popular cryptos like ETH, BTC, LTE
Fee for $15k Trade: $7.50
Charges an Ongoing fee
Indices included: Cannabis, Dow Jones, FTSE 100,
Cheap dealing costs
Facility to trade with Live Prices
An extensive online social network that includes tutorials, webinars, and more
ASIC and FCA regulated trading platforms operating since 2010
At present, more than 89,000 traders active on this innovative trading platform
The daily trading volume of US $5.8 billion
Winner of the ADVFN International Finance Award for Best Forex Platform (2020).
Offers a broad array of chart-reading tools and technical indicators
Variable Commission (as decided by the broker)
Live account minimum: AUD$200
Leverage up to 1:30
An enormous array of financial instruments, with good commissions, and spreads
Choose from thousands of assets for portfolio diversification such as forex, crypto, shorts, CFDs, penny stocks, commodities like gold and oil, and spread-betting opportunities
More than 200,000+ active users
Access over 1250 assets
Commission: Yes (and $50 inactivity)
Trading min.: $100
Access 22 Indexes
Invest in a range of securities for diversity: CFDs, shorts, EFTs, forex, crypto coins, commodities
Copy trading feature available
Fee for $15k Trade: $15
Charges an Ongoing fee
Trade with Live Prices
6. Comparison Of Online CFD And Options Brokers
|Broker||Min. Opening Deposit||Commission - ASX 200 Shares||Available Markets|
|eToro CFD||US $200
||No commission||Forex, Shares, Indices, Cryptocurrencies, Commodities, ETFs|
|Plus500 CFD||$200||No commission||CFD on Forex, Commodities, Cryptocurrency, Indices, Shares, Options, and ETFs|
|Capital.com CFD||$0||$0||Forex, Shares, Indices, Commodities, Crypto, ETFs|
|AvaTrade CFD||$100||No commission||ASX shares, global shares, indices, metals, cryptocurrencies, commodities, ETFs, options, forex|
|ThinkMarkets CFD||$0||$0 for the standard account||Forex, indices, commodities, metals, share CFDs, ETF CFDs, futures|
|IG CFD Broker||$0||0.08% with a $7 minimum||Indices, FX, Shares, Commodities, Cryptocurrency, ETPs, Options, Interest Rates, Bonds|
|IC Markets CFD (True ECN Account)||US $200||0.1% per side||ASX shares, global shares, indices, commodities, forex, cryptocurrencies|
|Go Markets CFD||$200||$0||Stocks, Indices, Commodities, Crypto|
|Saxo Capital Markets CFD||3,000||0.10% with a $6 minimum||Indices, FX, Shares & ETFs, Commodities, Cryptocurrencies, Options, Bonds|
|City Index CFD||$0||0.08% with a $5 minimum||ASX shares, 4,500 global shares, indices|
|Blueberry Markets CFD Trading||US $100||$20 per month subscription plus 2% of trade size||Indices, ASX200 Shares, Commodities, Cryptocurrency|
|CMC Markets||$0||0.09% with a $7 minimum||Forex, Indices, Commodities, Cryptocurrencies, Global shares, ASX shares, Bonds|
|ACY Securities CFD||$50||No commission||NYSE, Nasdaq, ASX, FX, and CFDs on shares, forex, indices, commodities, precious metal, ETFs, and cryptocurrencies.|
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.
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 TD 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.
In the case of the TD 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 buys them back at a lower price and makes a profit from the difference in value.
Alternative methods of short-selling stocks are:
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 a good 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 reach “Elevated Levels”
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 disseminate fake information are prohibited from short-selling in Australia.
Does Commsec Allow Short Selling?
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, buy them back 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 TD Ameritrade platform.
Note: You can’t short-sell penny stocks or OTCBB stocks on this platform. Also, you can’t reserve shares for shorting later.
Open an account with TD 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.
Place an order to short sell order of your choice
Fund your trading account with a minimum balance of 2,000 dollars to be able to short-sell a stock within a TD Ameritrade margin account. It is for covering 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 as 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 most successful short sellers of all time:
What Apps Let You Short Stocks?
Once you understand how to short-sell a stock, you will need an app to do so. 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 are low on time.
CMC Short Selling App
City Index CFD App
Saxo Capital Markets CFD App
Go Markets CFD App
IC Markets CFD App
IG CFD App
ThinkMarkets CFD App
AvaTrade CFD App
Capital.com CFD App
Plus500 CFD App
Vantage CFD App
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.
Useful Links to Explore: