IS SHORT SELLING WRONG?

Recently there has been a selection of articles in the media arguing that shorting shares (or profiting from a decline in a share price) is wrong, in fact some go as far as to say morally wrong.

However you'll often find that most of the detractors of short selling are those who've been on the wrong end, ie company executives complaining when their shares get plummeted.

To state that shorting is morally wrong in a capitalistic society most probably stretches it to the extreme. What is morally wrong to one person can often be very good business to that same person if the roles are reversed. For example if you've just been charged £75 in penalty fees for going £20 above your overdraft limit you can view that as morally wrong, and rightly so. But if you were the Bank executive that was responsible for implementing the penalty fee schedule which subsequently added £500 million a year of profits to your bank you could well be the toast of the company. If this was the case it's highly unlikely that the phrase morally wrong would be entertained by either the Bank or you yourself.

So whatever your view on short selling in this dog-eat-dog world making money via these types of strategies should be construed as nothing more than business, moral or not.

Why Everyone Should Learn How To Short Sell

10 years ago one could have argued that there were two types of people involved in the markets, professionals and private individuals. The professionals were the banks and funds while the private individuals were mainly small time investors, and for each group there was a different sets of rules.

But no more, now almost every tool and advantage that a professional enjoyed is available to a private investor even if they have a small account of a few thousand pounds. Cheap commissions, derivatives, free or almost free real-time prices, trading software and of course the ability to short sell.

So if short selling is offered to private investors then we should all at least learn the skill even if it's a strategy that we have never thought of implementing. The markets are now quick, the world can change in a matter of days or weeks and there may be a time in the future where you want to or need to sell something short either for a punt or a well thought out investment plan. Remember that short selling can be one of two things, either an offensive manoeuvre looking to make money, or a defensive one where you're looking to hedge or protect your stock holdings.

If you know nothing about short selling and suddenly decide today that you need to hedge your £50,000 portfolio then chances are without any experience you'll mess it up. Practice makes perfect.

How To Short Sell - Use Spread Betting As a Training Ground

With any financial tool or strategy experience is often the key to fully understand how things work and how to implement them. To get a good grounding in how short selling works first read the LearnMoney guide by clicking here.

Then think about applying the knowledge in real time. Perhaps the most prudent strategy is to take the learning process in two stages. Firstly open up a dummy real-time trading account to practise with, and secondly open up an real-money account depositing a small amount of capital (£100) and subsequently trading with very small risk.

Both Capital Spreads and City Index offer dummy accounts and the spread bet broker Finspreads lets new clients risk a minimum of 1p a point on any financial product alongside having a minimum account opening balance of just £100. So you could for example sell short the FTSE 100 index risking 10p a point and even if the it moved 10% against you the loss would be little more than £45.

Once you're comfortable in what you're doing and how things work you have 3 choices;

• Close down the account with your training completed
• Keep the account open and continue to trade, or
• Keep the account open, withdraw your cash balance but be ready to pay money in again should the need to trade arise in the future. Most if not all the Spread Betting firms allow you these days to quickly pay money into an account using a Debit Card like Switch