Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Shorting a stock
Many investors and traders profit from bull markets. They invest in
companies they expect to grow based on optimistic views. However, some
dealers attempt to profit from declining share prices, struggling
businesses and market crashes. These dealers are known as “short
sellers” and prefer to profit from negative market sentiments, such as a
bear market.
There are various ways to short a stock. In this article, we investigate how to short a stock via leveraged trading, and key signals when deciding what stock to short. Shorting stocks is more complex than trading based on optimistic market attitudes. Therefore, it is important to understand how to get started short selling and the implications of doing so.
What does shorting a stock mean?
Most investors aim to benefit from stocks or shares that are forecasted to have the potential for future growth and development. However, short selling or shorting stocks is a trading technique that involves profiting from the decline of a company’s share price.
Traders who follow conventional trading strategies are usually looking for markets that are becoming more relevant or companies that are outperforming the market average. However, short-sellers do the opposite. They look for shares that are underperforming in the market or shares that could become less relevant in the near future.
How does shorting a stock work?
Unlike most traders who like to buy low and sell high, short-sellers adapt the order of this philosophy and aim to sell high and buy low. Short selling is a complex topic, and there are many things to be mindful of when shorting a stock. A stock can be shorted in two ways, with a traditional brokerage or a leveraged trading provider.
Traditional brokerage
When shorting a stock via a traditional broker, traders borrow shares they do not own. These shares are usually lent from their financial broker. The trader then sells the borrowed shares at market value. The trader aims to repurchase the same shares at a lower price and return the shares to the lender. If the price of the stock drops, short-sellers profit from the difference in price between the rate they borrowed at, and the rate they repurchased the shares.
This method does come with some caveats, but namely that it is up to the broker to decide if the share can be shorted. However, say that you can find a broker to lend you a stock to short, you will most likely have to pay borrowing fees as well as any dividends paid by the borrowed stock. Given the costs and the complexity of short selling, it is often recommended for experienced traders. There is, however, a more accessible way to short sell stocks known as leveraged trading.
Leveraged trading
When traders short sell via leveraged trading, they do not own the underlying stocks. Spread betting and CFD trading are two types of leveraged trading with many similarities and some unique differences. However, both products offer the trader an opportunity to take a ‘sell’ position on shares and profit from stock price downfalls without the need to borrow physical stocks. With leveraged trading, your profits and losses are magnified by your leverage ratio.
Spread betting
Spread betting is a popular form of leveraged trading which is available only in the U.K. and Ireland. Spread betting involves traders placing a bet on which direction they think the stock market will move. This method of leveraged trading provides an efficient method to short a stock without having to wait to borrow stock. Additionally, spread bet profits are commonly tax-free*. However, the spread is a key cost when shorting stocks via spread betting. View our competitive spreads across thousands of stocks and ETFs here.
CFD trading
CFD trading is an alternative to spread betting and is the most popular method of leveraged trading. CFD trading is available globally, providing an efficient method to short stocks from most countries. Similar to spread betting, CFD traders speculate whether they believe the market will fall or rise, receiving profit for correct speculations and incurring a loss for incorrect predictions.