Basics

• Short selling is a concept of trading that allows investors to profit from a fall in a price of an instrument rather than a rise
• Traditional investing or speculation has always been about making money in rising markets. An investor buys ABC stock at £1.00 per share and then sells it in the future at £1.25 yielding a profit per share of £0.25
• Short selling is the opposite
• Instead of a trader buying ABC shares because he is bullish, he sells them short because he has a bearish outlook on either the share or the stockmarket in general
• The bearish trader sells short (or opens a short position) the share at £1.00 to go what is effectively known as 'short'
• Take the assumption that the price does decline, and a profit of £0.30 is taken by 'covering' or buying the short position back at £0.70
• Do not start to get sidelined by the fact of owning or not owning the share or instrument it will only confuse you
• Instead, simply view the product that you're trading as a number, and the short seller will make money if that number declines and lose money if it rises

An Example Of Short Selling Using a Spread Bet - Vodafone

• The market for the March Vodafone contract is 150p-151p (bid/offer spread)
• You are bearish of the stock, expecting prices to decline
• You therefore instruct your spread bet broker to sell £1 a point short at 150p (on the bid price)
• The spread bet trade will therefore make money if the share price declines and lose if it rises

Three Possible Outcomes For The Short Seller

1. A Winning Trade - Vodafone shares drop to 125p

What is your profit?

• 150p (initial short price) - 125p (present price) = 25p or 25 points
• £1 (stake) x 25p (share decline) = Profit of £25

2. A Losing Trade - Vodafone shares rise to 180p

What is your loss?

• 150p (initial short price) - 180p (present price) = -30p or 30 points
• £1 (stake) x -30p (share rise) = -£30 loss

3. A breakeven trade – Vodafone shares at 150p

• 150p - 150p = zero
• £1 (stake) x 0p = £0

This Chart Below Illustrates the P&L Profile of a Short Trade