How to short sell in trading
"Buy low and sell high". This can work when markets are going up. If you buy the Company 'ABC' at 100 euros and then sell it at 150 euros, that is a profit of 50 euros, less commission or interest.
But what happens when the market is not rising? What if the market is going down? If you bought shares in Company ABC and they went down, you could have lost money. However, there will be some smart traders who are short on the stock market. Their short positions will earn them money as long as the market continues in their direction.
Find out everything you need to know about short selling:
- What is short selling
- How to trade short
- Advantages of short selling through CFDs
- How to short forex
- The best stocks to short and the markets in which you can trade short.
What is short selling?
You may have asked yourself the question 'what is short selling?' Short selling can be defined as making a bearish or negative trade on an asset.
Instead of buying low and selling high, you will sell high and buy low, making a profit on the change in the asset's price. In this case, the trader believes that the market will go down and will want to benefit from the movement by initiating short trades, or a "sell" position, rather than a "buy" position.
How does short-selling work?
One of the biggest questions beginning traders have when considering short selling is, how can they sell something that doesn't belong to them?
Traditionally, a short trader would borrow shares (which he did not own) from his broker's account. It would then sell these shares on the open market at the current market price. The short investor's goal was to buy back those shares at a lower price in the future and then pay back the borrowed shares. They would then pocket the difference between the initial selling price of the shares and the cost of buying them back.
Mathematical formula of a short sale
The mathematical formula for short selling is relatively simple. By default, online brokers always show net profit or loss on trading platforms.
The lower the share's buyback price relative to its selling price, the more money you make. In other words, the lower the price of the shares sold short, the more likely it is to make a significant profit.
What is the best time to trade short?
Unfortunately, no one can predict the future. However, there are certain scenarios where short selling can be helpful. Here are three scenarios where shorting might be a good option:
# 1. When a financial crisis occurs Do you remember the financial crisis of 2008? What about the tech bubble 2000? Crises do happen, although not so often. It's all about being prepared though, so if it happens, you know what to do.
# 2. A company scandal This scenario happens more often than financial crises. Remember the Volkswagen diesel emissions scandal in 2015?
# 3. A loss of profit Every quarter, public companies publish their earnings report. Analysts release their estimates of what they think will be the number of earnings per share and earnings, among others.
Why can short selling be restricted?
It may be that a particular market or regulatory body may impede the ability to short sell a particular stock or shares.
In general, restrictions on short selling are applied to protect companies and prevent abuse by unscrupulous speculators.