Strategies

What is short selling?

Short selling, also known as ‘going short’ or ‘shorting’ is a trading strategy that speculates on the price decrease of a stock or other security. Short selling a stock means you sell a stock you do not own by borrowing it from someone who does. If the price of the stock declines, you can buy it back at a lower price, profiting by the difference.

Why would you go short?

Short selling gives you different investment opportunities. The two most popular reasons for taking a short position are speculation and hedging.

Short selling to make a profit

Going short offers you a whole new dimension of market movements on which to speculate, as it’s possible to make money even when the price of the asset falls.

Short selling to hedge open positions

Hedging is the practice of taking two positions at the same time to offset losses from one position with gains from another. It allows you with a short position to protect yourself against losses on a long position. For example, if you anticipate a price drop in a stock, you can use a short derivative position to absorb the risk. While hedging your positions does not necessarily prevent you from experiencing losses, it can ease the pain.

Short selling with EXDEGIRO

Our Debit Securities service allows you to short sell. This service facilitates the possibility of short selling cash market securities, such as stocks and ETFs. This means that you can sell a security that you do not own and, therefore, borrow from another investor with a long position in the same security. At EXDEGIRO, it’s not possible to short products on American, Canadian, Asian or Australian exchanges or products that are category D. Apart from these, there are other securities that are excluded from this service due to borrowing restrictions.

How can you short a stock?

Before you can use our Debit Securities service and go short, you have to pass the relevant appropriateness tests to make sure you know how it works and the risks involved. After completing these tests, you can simply place a sell order for the stock you want to short. If the transaction is successful, the short position will show up as a negative number of shares in your portfolio. To close the position, you have to buy back the same number of stocks you shorted by placing a buy order.

The costs of short selling

Although this is not a cost, when entering a short position, margin needs to be deposited in your account. With a short position, you receive the money from the transaction. For example, if you short ten shares of ING worth €100, this €100 will appear on your account. And in your portfolio, you’ll see a position of ING with -10 in the quantity column. Margin is required to cover the risk that you will not have enough money to buy back these shares. The amount of margin required is based on the risk category and value of the product. You can find more information about margin requirements here.

Aside from margin, when you enter a short position, you will have to pay transaction costs. Both buy and sell transactions are charged, which you can see on our Fee Schedule. On top of transaction costs, there are short stock fees. The short stock fees depend on the risk category of the product. You can find details about this here.

The risks of short selling

While short selling can be rewarding, it also comes with risk. Since the price of the underlying security can theoretically increase without limits, the loss on the short position can also be unlimited.

As share prices are constantly fluctuating, it is possible that limits may be breached resulting in a margin call. In this case, we will notify you to resolve the deficit before a given deadline. You can resolve the deficit by either transferring funds or closing positions. If the margin call is not resolved before the given deadline, we will have to intervene.

In addition, we have the right to request a buyback of the relevant shares to close your short position at any given time. In the event that you do not close the short position by the given deadline, we can buy back the shares on your behalf. More information about this can be found in the document Debit Securities Conditions.

The information in this article is not written for advisory purposes, nor does it intend to recommend any investments. Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products that match your knowledge and experience.

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Note:
Investing involves risks. You can lose your invested funds. This is not investment advice. Consider your knowledge and experience when making investment decisions.

Investing places your capital at risk. Read our full warning here.

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