Pros and cons of short-selling
Pros of short-selling
Short-selling means that you have the opportunity to profit from markets that are declining in value, not just ones that are increasing.
Short-selling can be carried out in a variety of ways. The example above demonstrates the traditional method of short-selling via a broker, but traders will define short-selling slightly differently to investors. Thanks to the rise of online trading and derivative products – such as CFDs – traders can take a short position on thousands of markets without having to borrow the underlying asset.
They can be used in a speculative manner, taking naked short positions, or for hedging purposes (such as part of a spread trade).
Cons of short-selling
Short-selling can be a risky strategy, as assets can theoretically increase in value indefinitely. Leveraged products can increase risk further, amplifying losses when a market is heading upwards in price.
A good risk management is key when short-selling, using tools like guaranteed stops to prevent excessive losses. Using a guaranteed stop on the IG platform will incur a fee if the stop is triggered.
There’s also a recall risk, in the event that the stock lender wants to liquidate their position and therefore recalls the stock lent out, which in turn forces the borrower to liquidate their position at a potentially unfavourable time.