You may have heard the term “short selling” or “going short,” and there’s a good chance you know what it means. After all, short selling is one of the best ways to try and turn a profit when markets are down. In short (pun intended), short-selling is a practice which enables traders to open a position that will increase in value if a financial instrument’s price goes down. This is used either when markets are falling, or as a hedging tool.
How short selling works
Short selling is an agreement between a trader and a broker, that can be carried out in various forms. The simplest scenario is one in which the broker lends the trader a certain asset, such as a number of a certain company’s stocks. The trader then immediately sells the stocks, and, after their price goes down, buys them back for a lower price. He then returns the assets to the broker and keeps the difference.
Of course, this is the optimal scenario for the trader, and often the transaction can prove to be less favourable. The term “short” refers to the fact that, after borrowing the stocks and selling them, the trader is now “short” a certain number of stocks.
On the eToro platform, short selling is done using a Contract for Difference (CFD). When using a CFD, the broker and trader agree to the terms beforehand and settle the difference between themselves at the end of the transaction, without the underlying asset changing hands. If the broker is licensed and regulated, they are required to give their client market conditions that reflect the actual market as closely as possible, which is why using a CFD for short selling under these circumstances does not present a conflict of interest.
Opening a SELL position on eToro
eToro strives to give its clients an intuitive interface and a smooth trading experience, which is why opening a short position can be done quite simply on the trading platform. All you have to do is open a trade, and switch the toggle from “BUY” to “SELL”:
As soon as you switch to SELL and open your trade, the position will open as a short-selling position and will increase in value as the asset’s price goes down. Remember: the SELL function does not mean that you’re selling assets out of your portfolio, but rather, opening a new position that is “short”.
Like all trading platforms, prices on eToro have a spread, meaning the BUY and SELL prices are different (the BUY price is always higher). Therefore, when closing a short position, be sure to check the BUY price on the platform, as that is the price you will receive when closing.
Once you open the position, it will appear in your portfolio as a “SELL” position:
Short selling is a powerful tool and traders should familiarise themselves with it. When adding short selling to your trading and investing toolbox, a variety of new possibilities open up for you, as you can turn a profit even when markets are down. Moreover, short selling can be used as a hedging tool, to protect yourself from some losses if a certain position backfires.
Now that you have a better understanding of short selling, we recommend experimenting with it by opening a few short positions using your virtual eToro account.
Your capital is at risk. This is not investment advice. CFD trading.