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How to Short Stocks: A Beginner’s Guide

Looking to profit from the expected fall in the price of a stock? In this guide, we'll walk you through how short-selling works, and how you can get started today.
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Author: Adam Green

Last Updated: June 17, 2020
Short Selling Stocks | How to short stocks
Short Selling Stocks | How to short stocks

Have you ever wondered how to profit from falling stock prices, and want to give it a go yourself? In this guide, we explore how it works and how to get started.

Stock prices move up and down every day with supply and demand. Sometimes, these movements are just random noise. In many cases, however, stock prices fall following negative news about your focus company, the industry or the broader economy. If you think this will happen, short-selling can allow you to profit from downward movements in stock prices.

In this 3-step guide, we will explain how short-selling works and how to open a brokerage account that will allow you to short stocks.

On this Page:

    Our 3-step guide to shorting stocks:

    Step 1: Choose the right broker for short-selling stocks

    eToro Index Trading

    Before deciding which stock(s) to short, review our featured brokers to find one that's right for you.

    Step 2: Learn how short-selling works

    Depictio of man thinking of money and risks illustrating a Registered Investment Advisor | Learnbonds

    Short-selling can be a very profitable strategy. Learn how the process works and review the risks.

    Step 3: Set up your account & get started

    A downtrending market and a dollar coin depicting a recession | Learnbonds

    All set? Open an account, try your hand with a free demo account, do your research, and start trading!

    Disclaimer eToro: 62% of customers lose money while trading CFDs.

    Step 1: Choose a broker that allows you to short stocks

    Before deciding which stocks, indices, or funds to short, you first need to open a brokerage account that will allow you to short stocks.

    While most major brokers that offer direct stock trading also offer margin accounts, the requirements (in terms of minimum deposits and prior experience) can be quite high. The brokers know that short-selling is risky and may not want (or be legally allowed) to let you open a margin account unless you can show a sufficient degree of trading experience.

    In addition, a lot of the most popular free trading apps do not offer short-selling, in part due to the difficulties for the broker to enable direct short-selling.

    Fortunately, a myriad of online brokerages make short-selling much easier by allowing you to short stocks via CFDs (the difference is explained in Step 2).

    Below are some of the most popular stock and CFD brokers allowing you to short stocks:

    1. eToro: European leader in CFDs trading, with excellent tools for gauging market sentiment

    eToro has grown exponentially in recent years, becoming one of Europe’s most popular brokers with over 5 million users. It also boasts of hosting thousands of financial instruments (Stocks, ETFs, Forex, Crypto etc.) available in CFDs.

    Its web & mobile platforms are very intuitive, user-friendly, and will help you seamlessly keep track of your positions. eToro’s platform is rich in features, from charting tools to newsfeed and key statistics about companies. eToro does not charge commissions, instead relying on a bid-ask spread and overnight fees for multi-day positions.

    Short-selling requires a blend of financial analysis and reading of market sentiment, and eToro offers a real edge to short-sellers thanks to its sentiment analysis tool. For each stock, you can see the percentage of eToro users who are trading it, and the percentage of people who are long or short the stock. You can also use the chat boards for each stock to see what people are saying and use eToro’s famous CopyTrading platform to understand who is long or short a stock. Together with your own analysis, leveraging the social features of eToro’s trading platforms will allow you to develop and refine your short ideas, whether you’re a trend surfer or a contrarian.

    The signup process is quick and easy. After you create an account, you will be asked a series of questions ranging from personal information (address, phone, nationality) to financial knowledge, trading experience, risk averseness, and trading objectives. The questionnaire is simple and only takes a few minutes. Once done, you simply have to confirm your phone number, deposit money into your account (via credit card, PayPal, Wire Transfer, UnionPay and other options) and start trading.

    Nonetheless, given the risk & complexity involved in short-selling, we recommend getting a good hang of the platform via eToro’s free demo account (no deposit required) before placing your first trades!

    Our Rating

    • One of the widest ranges of stocks offered via CFDs
    • No commissions & competitive pricing
    • CopyTrade platform & sentiment meters make it easier to trade & find ideas
    • Stocks trading unavailable to US clients
    CFDs are complex financial instruments and 75% of retail investor accounts lose money when trading CFDs.

    3. CryptoRocket: New, easy-to-use broker with lightning-fast signup & ultra-tight spreads

    CryptoRocket is a relatively new player in the market, offering a range of stocks, indices, currency pairs and a wide variety of cryptocurrencies to trade via CFDs. As a newcomer, CryptoRocket chooses to focus on extreme simplicity as a way to quickly carve itself a place in the market.

    It is fully integrated to the MetaTrader 4 and Webtrader desktop, web and mobile platforms, offering a wide range of analysis & customization tools for traders of all levels.

    Because CryptoRocket likes to keep it simple, it offers only one account type, a lightning-fast signup process with no cumbersome ID verification, a $10 minimum deposit (Visa, Mastercard, Wire Transfer or via a Bitcoin wallet), and an excellent 24/7 customer service.

    The leverage offered here ranges between 30:1 for stocks and 500:1 for forex & commodities. CryptoRocket offers competitive spreads on all its available assets, no deposit fees, and no commissions.

    Before starting to trade, particularly before entering short positions, we recommend you to use CryptoRocket’s free demo account to get a feel of the platform and the tools it offers!

    Despite CryptoRocket’s popularity as a CFD broker, it is important to note that it is headquartered in St. Vincent and Grenadines and is not regulated in the US or the EU+UK.

    Our Rating

    • Very fast & easy signup process
    • Integration with MT4 and Webtrader makes trading frictionless
    • Tight spreads
    • Smaller range of Stocks despite strong Crypto offering
    • Offshore broker (unregulated)
    Disclaimer: Transacting in ETFs, Stocks, CFDs and other financial instruments is subject to various risks, such as price volatility, and is not suitable for everyone. Your capital is at risk.

    Step 2: Learn how to short stocks

    What is short-selling?

    Going ShortShort-selling (“shorting” or “going short”) stocks is the practice of borrowing a stock to sell it today (at a high price) and repurchase it later (at a lower price) to give it back. It is a bet that a stock price will fall, sometimes significantly.

    If you are right and the stock indeed falls, you can cash in a hefty profit: the difference between the price at which you sold & the price at which you repurchased.

    How is short-selling beneficial to the stock market?

    Short-selling is essential to the functioning of financial markets.

    First, short-selling can exert downward pressure on share prices (when there are more sellers than buyers), helping price discovery and preventing bubbles.

    Second, a large short interest (shares currently sold short/total shares floating in the market) can act as a signal to investors that a company may be in trouble.

    Third, the presence of short-sellers can have a disciplining effect for managers of public companies, by reminding them that bad decisions will be punished by the markets.

    What are the main types of short-sellers?

    There are three primary types of short-sellers.

    The first are day traders and short-term investors, who frequently use short-selling as a way to profit from temporary price drops.

    They will typically short the stocks of companies expected to miss earnings, to announce project delays, or to be subject to a short-term price drop for any other reasons. These traders usually keep their shorts open for a few hours or a few days, and seldom maintain week- or month-long positions.

    The second are “thesis-driven” investors, typically hedge funds, who think that a company (or a security) is fundamentally overvalued and bound to experience a significant price loss.

    These investors can spend months or years researching companies, looking for false narratives, fraud or any other evidence of unjustified overvaluation. When they are convinced of their case, they usually publish their findings publicly and initiate significant short positions, waiting for their thesis to realize.

    Famous examples include Steve Eisman’s (“Mark Baum” in The Big Short) bet against CDOs & the American housing market in 2007-08, Fahmi Quadir’s assault on Valeant Pharmaceuticals (as seen in Netflix’s Dirty Money) or Carlson Bock’s recent high-profile battles against Casino, TAL Education, or eHealth.

    Last, a large number of investors (typically hedge funds) will use short-selling as part of their trading strategy, typically for hedging purposes. Long-short portfolios can be useful to increase the profits or hedge the risks of larger trading strategies (e.g. betting-against-beta, momentum etc.), without necessarily having a specific view on each shorted stock.

    How to short stocks?

    Trading board to represent How to go short on stocksThere are two main ways retail investors can short stocks: directly, or via Contracts-For-Difference (“CFDs”).

    Shorting directly

    Shorting directly means borrowing shares, selling them at their supposed overvalued state, and repurchasing them later on after the price has dropped and returning them to the lender after making a profit. In order to directly short-sell, you need to open a qualifying account (typically called a “Margin Account”) with your broker. You will then have to fund the account, and your broker may require a high minimum amount (the “margin requirement”) either in absolute value or as a percentage of the value of your short.

    When you want to short, your broker will lend you the shares for a fee (typically annualized and pro-rated) and will sell them for you. The short position is now opened.

    Your broker will then continuously monitor the value of your position and compare it to the amount of money deposited in your margin account.

    When you decide to close your position, your broker will repurchase & return the shares for you. If the share price has declined enough for you to cover the transaction & shorting fees, you then walk away with a profit.

    To learn more about trading stocks in general, have a look at our Online Stock Trading Guide.

    Shorting stocks via CFDs

    Shorting via CFDs is much simpler than shorting directly and could even cost you a lot less. All you need is a basic account with a CFD broker and some money for the margin requirement.

    When you want to short, simply place a “sell” order via CFD. Your broker does not actually borrow & sell shares for you but merely takes the other side of the bet (there are no shares changing hands).

    The broker will still ask you to put up a percentage of the transaction value as collateral. Since your position is marked-to-market, the margin requirement & margin call dynamics are the same as for a direct short. The margin requirement may, however, be lower.

    Much like a direct short, there are daily fees for short positions. While your broker may charge a wider bid-ask spread than if you bought & sold real shares, several CFD brokers will credit your account with daily interest on your open short positions.

    To learn more about CFDs, visit our CFD Trading Guide!

    Risks of short-selling stocks directly vs CFDs

    There are several risks associated with shorting, directly or through CFDs.

    1. Price rise and/or wrong timing: If the stock price goes up a lot, you will be asked to put more money in your account (a “margin call” up to a certain % of the value of your position) as a way for the broker to make sure you have enough money to sustain the losses. A stock cannot fall below zero, but can go up indefinitely, making the margin calls too heavy to bear (a “short squeeze”). Even if you are right eventually, if your timing is wrong, the margin calls may force you out of the position before it pays off.
    2. Short-selling bans: In situations of severe market volatility (e.g. in 2008 or during the Covid-19 crisis), governments may impose short-selling bans that can force short-sellers (direct and even via CFDs) to close their positions at the wrong time.
    3. High fees for hard-to-borrow stocks: Further, some heavily shorted stocks may come with significantly higher borrowing fees, increasing the amount by which the stock will have to fall for you to make a profit.
    4. Dividends: Last, if the stock you’re currently shorting pays a dividend, you are responsible for paying it to the party you borrowed the stock from (the lender for direct shorts, your broker for CFD shorts).

    Other methods

    In addition to the above, investors can profit from a fall in share prices via other instruments, such as options or swaps etc., although these tend to not be widely available to retail investors. It is worth noting that virtually any security (stocks, bonds, ETFs etc.) can be shorted, with varying degrees of difficulty. Follow this link to learn more about how ETFs work.

    Step 3: Set up your account and get started

    Now that you have chosen a broker and learned how to short stocks, let’s look at how to place your first trade. We will use the extremely popular eToro trading platform as an example.

    First, let’s set up an account by signing up. You simply need to provide basic information and a valid phone number to get started.

    eToro Signup step 1

    You will then have to fill a short questionnaire before starting to trade.

    eToro will first ask you for more personal information, such as address and occupation. You will also be asked about your net worth, your investment style, and your trading experience.

    eToro Risk Appetite

    Once you are through with the questionnaire, you can get started trading. In order to unlock the full potential of the platform, you will need to submit your identification documents to verify your account.

    Before doing so, however, you can use eToro’s free “Virtual Portfolio” to get a feel for the platform:

    eToro Virtual Account

    Above, you can see the stocks in your watchlist, their recent trajectory, the bid-ask price, and some basic sentiment data.

    To short a stock, search for it, select it, and click “Trade”. Choose “Sell”, select your order type, amount, and the leverage you want to use. You will see the daily fees for your position at the bottom of the window. When you are ready, click “Set Order” to confirm your trade.

    Short Stock eToro

    Once you are comfortable with the platform and ready to trade with your money, the last step is to fund your account and get started.

    The Bottom Line

    In this guide, we explained how short-selling works and how to get started with the right broker.

    Shorting stocks is not easy and carries some risks, but it can be a very profitable strategy if done correctly. Don’t forget that getting the timing right is just as important as actually being right. Happy trading!

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    Disclaimer eToro: 75% of investors lose money when trading CFDs.

    FAQs

    What does short-selling mean?

    Short-selling typically means borrowing a stock to sell it now, and repurchasing it at a later date to return it to its owner. You profit if the stock price falls, by selling high and repurchasing low.

    What does it mean when a stock is Hard to Borrow?

    Hard to Borrow (HTB) means that there is a limited supply of the stock to borrow. Usually, this means that the stock is heavily shorted, and can result in much higher borrowing fees for direct shorting.

    How do margin calls work?

    When you are short a stock that moves up a lot, your broker may decide that you dont have enough money in your account to cover your possible losses. The broker will then require you to put more money in your account (the margin call). If you cannot, the broker will liquidate your position.

    What happens when dividends are paid on a stock I shorted?

    If the stock you shorted pays a dividend, you are required to pay the dividend amount to the stock owner.

    How do short-selling bans work?

    In rare occasions, governments may temporarily ban short-selling. In this case, short positions may have to be closed, and short-selling is no longer possible including via CFDs.

    What types of fees can I face when short-selling stocks?

    Short-selling fees will typically include transaction costs, spreads and borrowing fees (annual, pro-rated daily).

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    All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
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    Adam Green is an experienced writer and fintech enthusiast. He he worked with LearnBonds.com since 2019 and covers a range of areas including: personal finance, savings, bonds and taxes.

    10 Comments

      • @Tipster, if you are shorting directly, it means that you will have to borrow these shares from your broker at a fee. They will in turn borrow from their clients or lend you the shares that are in their custody. If you, on the other hand, want to short stock CFDs, you don’t need to borrow shares. You only need to open a ‘sell’ order on your CFD account which translates to betting on price changes against your broker.
      • Hello Gilbert, it will cost you less to short stock CFDs than shorting directly. When shorting directly, you first need a qualifying account that often carries a minimum account opening balance, you also have to pay stock borrowing fees, and daily rollover fee in the case of a long position or hard-to-borrow stocks. There often are no minimum account balances when operating a CFD account. The margin requirements are lower and so are the daily fees for open positions. plus you get to keep daily interest accruals for your open position.
      • Judith, how you react to the profit warning should be informed by the company’s fundamentals. Only short if you believe the action leading to the profit warning may cause the company shares to take a beating for a longer period of time. Avoid one off causes of profit warning that won’t damage the company reputation as there is a risk of an unexpected recovery.
      • No, when shorting CFDs, there are no shares involved. You are simply betting against the price of your preferred shares. When shorting directly, you deal with borrowed shares. You don’t own them but are simply paying a fee to use them. That’s why you don’t keep the dividends paid at the time you were in possession of the shares but forward it to the brokerage or the owner.
      • Hi, there are numerous risks associated with shorting stocks but two stand out. One is the fact the lender of these shares can call them back at any time which exposes you to the risk of losing your investment and profits. Secondly, there is always the risk of markets overturning sharply and stocks rallying due to unexpected good news, inflation, take-over bids and a host of other factors. This triggers a massive selling action by short sellers which pushes the share prices further up.

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