Short Selling "Going Short" or "Shorting"

Overview: Short selling is a valuable tool in any trader's armoury: not only can you take advantage of a bearish market via ETO's, Contracts for Difference CFDs, Forex (Foreign currency trading) and Index trading, but the trader can also short sell shares. 

Clarification: Let us clarify the terminology used. To avoid confusion (and subsequent monetary loss), instead of talking about buying or selling, market participants use the terminology of:   

"Going Short": When an trader believes that there will be a decrease in the share price in future or any instrument such as Forex, Indices or commodites, the trader “goes short on the investment.” The trader goes short as they are selling with a bearish mindset.

"Going Long": There are times when a trader anticipates that a stock (or any instrument such as Forex, Indices commodites) will increase in value and makes a deal in order to gain in the long term. This is when the investor “goes long on a trade.” The trader goes long as they are buying with a bullish mindset.

Short-Selling Shares: short selling shares is when a trader borrows a share and sells it in the hope of buying it back at a lower price. Because the trader benefits if a company’s share price falls, short-selling has been linked to false, negative rumours about companies — rumours intended to push share prices down.

Short selling or “shorting” is a practice of selling securities that the investor does not own it at the time of sale. The investor anticipates that the price of the stock will decline in the future and short sells it in order to purchase the security at a lower price. A short seller “borrows” the securities to be sold and repurchase them for returning to the lender. If the price of the stock declines, the investor can make huge profits by short selling them. Conversely, if the price rises the investor can lose a huge amount of money.

When would you Short a stock? When you have a view that the value of those securities are likely to fall, i.e. either a bear market or bear trend.

Can all shares be short sold? No, they have to be on an Approved List of securities of the ASX and you should consult your broker as to this prior to placing an order to short sell. Some brokers will not short sell due to the increased risk, however there are other brokers that will.

What are the restrictions? Your broker will ensure that your transaction does not bring the total of short selling volume for that particular stock to more than 10% of the listed securities (min; 50 million) available for that company. The company must also have a minimum market capitalisation of $100m and be approved by the ASX for short selling. Additionally, you are not able to short sell at a price lower than the last trade price, this prevents short sellers forcing the market down but can make timing of short selling awkward in a falling market.
 

How is this done? Through certain full service brokers, they will; borrow the stock from another shareholder on your behalf through a custodian, these will then be sold onto somebody else. At a later stage you will have to buy those shares back and return the ownership to the original shareholder.

What is the cost? Typically this is negotiated between yourself and the broker, but be mindful that you will be;

• Liable for any dividends and their franking credits to the buyer over the period.
• Interest costs that may be charged by the broker for the duration.
• Initial and Subsequent Margin requirements to your broker.
• As the process is more complicated the brokerage may be more.

Example:

• You choose to short sell 1,000 MBL shares @ $62.49 giving a total value of $62,490.00.
• You will be required to provide an initial margin cover of 20% of this with your broker, i.e. 20% x $62,490.00. This can be in the form of cash or listed securities.
• If the shares rise while you are short sold, you are required to provide additional margin cover of 100%. That is, if the price increases by $1.00, you must provide your broker with additional margin cover of $1,000 (100% of $1.00 price rise x 1,000 shares).
• Similarly, favourable movements can be credited back to your account.