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Short selling enables traders to profit in a down market or protect existing investments. Find out how and why short selling can become a key part of a balanced trading strategy.
|What is short-selling?||Advantages and limitations||Market participants||Ways to short sell|
|Short-selling explainedHow short-selling works||Why people short-sellHedging exampleLimitations||Short-sellersWho lends the stock to be sold?||Through a brokerCFDs|
Short-selling is the practice of selling an asset that you don’t actually own, in the hope that the price will decline and you can buy it back in the future at a lower level. You can then keep the difference between the price at which you sold the assets and the lower price you paid to buy them back.
At IG, you can short-sell CFDs just as easily as you can buy them. When opening a trade, you simply click 'sell' instead of 'buy' to back a market to fall.
To find out more about placing a trade using our CFD platform, please visit our trading CFDs with IG module.
When taking a short position in shares, for example, the shares are borrowed from a third party – usually a broker – and then sold. The borrowing isn’t something the short seller will need to worry about though – it happens ‘behind the scenes’ when they request to short-sell.
Take a look at the two trade examples below – one making a profit, one making a loss – to further understand how short-selling works.
Let’s say that Macquarie is currently trading at A$21.24 per share. You decide to short-sell 1000 shares of Macquarie for a total of A$21,240.
Shortly afterwards, disappointing half-year profits cause the share price of Macquarie to fall to A$20.74. You can now buy 1000 shares of Macquarie for A$20,740.
You then return the shares to the lender, who accepts the return of the same number of shares as they lent, irrespective of the fact that the market value of the shares has decreased.
You retain the A$500 difference (minus borrowing fees/commission) between the price at which you sold the borrowed shares and the lower price at which you bought them back.
Let’s say that Vodafone is trading in the market at £1.50. You decide to short-sell 2000 Vodafone shares for £3000 (2000 shares x £1.50 per share).
Shortly afterwards, the price of Vodafone rises to £1.65. You need to close out to meet your obligation to the lender, by returning the same number of shares.
You buy 2000 shares of Vodafone for £3300 (2000 x £1.65). Your broker then returns these to the lender, who accepts the same quantity of shares.
You've made a loss of £300 (excluding borrowing fees/commission), which is the difference between the price at which you sold the shares and the higher price at which you bought them back.