Short selling Stocks give you an incredible opportunity to earn profits in liquid markets. It also helps you assess the Stock’s price direction and results in an improved bid-ask spread that can reap a return of as much as 100% to the short sellers.
Short sellers tend to bet on the drop of an asset’s price. This is quite different from long-term investors that want the prices to go up instead. However, we advise that you proceed with caution as a wrong move in short selling can also increase your losses quickly.
What does shorting a Stock mean?
Short selling a Stock is a way of earning profits when its price is decreasing. The trader borrows Stocks and sells them for the prevailing price with the intention to buy it back for a lower price. Once the trader buys it back, they return the borrowed Stocks, keeping the price difference to themselves as profit.
For example, you want to borrow shares of Company A at a price of $100 because you expect the prices to fall in the future. You short the Stock and borrow the Shares from your brokerage company and sell them in the Stock market for $100. Now, the Stock price ends up falling to $80, so you buy them back. You then return the Stock to your broker, keeping the $20 profit you’ve made through short selling.
When you short sell Stocks in large quantities, you can regulate the prices of the Stock to some extent. That is, if you and other short-sellers sell a large portion of a particular Stock. This will cause its price to decrease due to an increase in supply. When the prices fall, you can buy back the same Stock for a lower price and profit from the dip.
How do you short sell a Stock?
1. After analysing the market and Stock price movements, identify the company’s Stock you want to short sell.
2. Make sure you have a margin trading account. The margin that you put out with your broker acts as collateral, ensuring that you are going to return the Stocks in the future. You must have all the required permissions from your brokerage to open a short selling position with your account.
3. Enter a short order for the Stock you want to sell.
4. The broker lends you the number of Stocks you want to short sell and sells them in the Stock market in your behalf.
5. Once you see the Stock prices dropping, you close the position by buying back the Stocks you sold.
6. After buying it back, return the borrowed Stocks to your broker and keep the amount earned in the process as your profit. This is the traditional method of short selling a Stock.
7. Alternatively, if the Stock price increases, you have to buy the Shares at a higher price, which leads to a loss in trade.
More ways to short sell a Stock
You can short sell Stocks through Options trading. Trading Options in the Stock market provides you with the right to sell-off Shares at a price fixed by the broker before or on the expiry date.
For example, if Stock A costs $50 and you wish to buy a single Stock at the strike price of $50, you can sell it at this price. Let us assume that the Stock price fell to $48, so you buy it back at this price,then sell it for $50 through Options, keeping the $2 as profit. Options protect you against losses that you may incur if the price increases by allowing you to close the position at $40.
2. Short spread betting
Spread betting is the way of trading assets by speculating its price direction without owning it for real. With short spread betting, you can take a bet on the Stock price direction and place the trade accordingly. If you believe that prices will decrease, you may open the short spread position and wait for the prices to drop.
3. CFD trading
The last way of shorting a Stock is through Contract for Difference (CFD trading). It is a contract between the trader and the broker that mentions the price at which the trader can buy and sell the Stock.
For example, you wish to short sell Company A Stocks at $50 per share, with a margin requirement of 10% You can open a short position for 50 Share CFDs at $250 since [(50*.1)*50=250]. This gives you a market exposure of $2,500.
If the price of Company A Stocks falls to $40, you can close your position and buy back your Share CFDs at the new price. The difference between the opening and closing price is calculated as ($50-$40)*50 = $500. This is the profit that you’ll earn by short selling Stocks of Company A through CFDs.
Go short on Australian and US Stocks at Blueberry Markets
Short selling Stocks is a great way to maximise your trades without actually owning the asset. It gives you an opportunity to benefit from falling markets. Blueberry Markets allows you to short sell Stocks through CFDs, which enables you to take prominent market positions with only a small deposit.