Good news: it’s nowhere near as complicated as you think. Let us explain…
What Is “Shorting” or “Short Selling”?
Most investors or traders are betting that the financial instruments they buy, like a stock or bond, will rise in price (“going long”) . If and when they do, they can then sell them at profit.
“Shorting” means the opposite: speculating that the price of a financial instrument will fall – possibly even to zero – and profiting if and when you are correct.
How Does Shorting Work?
In practical terms, the trader borrows the instrument (eg, $10,000 worth of Apple stock), and immediately sells it – with the aim of being able to buy it back, later at a cheaper price, once the market price falls.
Shorting Can Be Obscenely Profitable…
George Soros famously made a billion dollars in a day shorting the British pound in 1992. British currency trader Joe Louis is thought to have earned a similar sum on the same short on GBP during the sterling crisis.
Ever seen “The Big Short“? You’ll recall it’s about the oddball and misfits that bet on the US housing market collapsing, when everybody else thought they were crazy.
…But Also High Risk…
Shorting anything is typically far, far, more risky than speculating that prices will rise.
This is because your maximum exposure can be unlimited.
With most regular investments or trades, you cannot lose more than your initial investment (with a few exceptions involving trading on margin).
If you invest $10,000 in Apple stock, the value cannot fall by more than $10,000. In the unlikely scenario that Apple’s stock price falls to $0 and it goes bust, you have lost $10,000.
But if you short $10,000 of Apple stock, the price can rise by any amount. It could double or triple, if a major external event is in play.
You could end up oweing many times your initial investment.
You can lose your shirt – and in seconds, if you make poorly considered, decisions without safeguards (more on that later).
What’s The Easiest Way to Short?
Short answer: it depends where you live & what you want to short.
If you live in the US, it’s likely put options (eg, )
If you live in the UK, it’s probably spreadbetting, such as IG Index
If you live outside the US/UK, it’s probably CFDs (“contract for difference”), like Plus500
That said – not every instrument is available to short with every instrument.
Shorting Stocks & Shares
mollit anim id est laborum.
Shorting Currencies & Forex
Currencies or foreign exchange rates can be incredibly volatile, as many traders discovered to their cost in 2015 when the Swiss Franc bankrupted many traders.
Shorting Commodities
Shorting Bonds
mollit anim id est laborum.
Learn More
Shorting Indices
Learn More
mollit anim id est laborum.
How to Short with ETFs
mollit anim id est laborum.
How to Short with Spreadbetting
If you live in the UK, spreadbetting is likely the simplest and most tax efficient way to short anything.
The good: X, Y and Z
The bad: X, Y and Z
How to Short with CFDs
Coming soon.
The good: X, Y and Z
The bad: X, Y and Z
How to Short with Put Options
Coming soon.
The good: X, Y and Z
The bad: X, Y and Z
How to Manage Risk Short Selling
The risks are magnified, as with all types of trading or investing, with the use of leverage.
The best way to manage risk depends on how you are shorting.
One way of managing risk is to use a “stop loss”, an instruction to sell at a set price (eg, if the price rises, when you are betting that it will fall).
With many spreadbetting providers, you may even be able to use a “guaranteed stop loss”, as with IG Index, all be at a higher “spread” (ie, price).
Learn More About Short Selling
The ever-excellent Khan Academy has an excellent beginners course on short selling.
Recommended Reading on Short Selling
Evil’s Good – Simon Cawkwells’s shorting diary
The Naked Trader’s Guide to Spread Betting