Short-Selling

Short-selling (or simply “short”) is the sale of securities, currency, or goods that do not belong to the seller at the time of sale. The purpose of ‌short-selling is to make a profit by reducing the value of currency, securities, or goods.

How Does Short-Selling Work?

Thanks to brokers and lending, you can sell, for example, shares that are not yours. You borrow shares from a broker, sell them, and are obliged to buy them back later to return them. You will get your profit if you can buy back shares cheaper than if you sold them. The difference in price will make up your income.

Short-Selling and Available Funds

As long as you keep an open position, there are additional margin funds in the account. This money can be disposed of.

Important! You should never open only a short position solely in order to receive additional funds in your account, since the main purpose of short-selling is earning on falling stocks, not receiving margin funds. If additional funds are needed, then you can always use leverage.

What Is the Catch of Using Short-Selling?

It is necessary to take into account a number of points:

• The broker does not lend for free. He takes a percentage for it. What percentage the broker will take, you need to look at the tariff plan, where there is data on the interest rate for short transactions.
• Margin call risk. The broker requires collateral. If suddenly the price goes up, not down, and the balance on the trader’s account is less than the minimum amount of the guarantee, the broker will forcibly close the position. This is called a margin call. Here, the investor simply will not be able to wait out the downturn.
• Limited choice of investment instruments. The broker allows you to short only certain securities. Thus, to open a short position, you need to analyze the market as carefully as possible, because if you make a mistake, you will lose money in a matter of minutes.

Advantages of Short-Selling

Short-selling has its advantages:

• A trader can short and make high profits even with a small initial capital due to the fact that the margin trading method is used for short-selling.
• Gains can sometimes be realized faster than when opening a long position, as asset prices tend to fall faster than they rise. It is possible to see this clearly during a market panic.
• The combination of short and long positions can reduce the volatility of the investment portfolio.
• When short-selling, there is often no need to hold a position for a long time. You can control the risks by shorting intraday or for short periods of time (for example, 1 hour).

Interesting Facts

Naked short-selling is described very well and plausibly in the 2015 film The Big Short starring Christian Bale, Ryan Gosling, Steve Carell, and Brad Pitt. The film is dedicated to the events of the mortgage financial crisis of 2007-2008 and has received many international awards, including the Academy Award for Best Adapted Screenplay.