Short-selling is the act of selling an asset that you do not currently own, in the hope that it will decrease in value and you can close the trade for a profit. It is also known as shorting.
Short-sellers tend to use this strategy for either speculation — in the hope that downward price movements return a profit — or as a method of hedging.
Most traders will define short-selling slightly differently to investors:
Investors usually short-sell via a broker. Short-selling via a broker means that your broker will borrow the asset (usually stock), sell it on your behalf, and add the funds into your account on credit. When you close the position, you buy back the asset and immediately return it to your broker.
Short-selling via a broker means that your broker has to find someone willing to lend them the stock, usually a long-term investor who is unlikely to need it back in the short term. If no one can be found to lend the stock, it is known as unborrowable stock.
Shorting a bond is just like shorting any other market — you earn a profit if the bond's price falls instead of if it rises. Like other assets, investors can short a bond by borrowing it and then selling it on in the open market.
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. For this reason, good risk management is key when short-selling, using tools like stop-losses to prevent running losses. Using a stop-loss on the IG platform will incur a fee if the stop is triggered.
Find out more about risk management.
There are more ways of attempting to make a profit out of downward price movements than short selling. See short for more information.
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