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What is Short Selling?

2020 6/01
What is Short Selling?

In this video David explains the idea of profiting when the price of an instrument is going down. This is one of the main aspects of the market and its participants and more importantly, it’s something that traders can take advantage of – no matter where the market is headed, a profit can be made in both directions, as long as you can predict it. David breaks down what initially looks like a hard concept into details and shows you how to use short selling in your trading strategy.

At Trading 212 we provide an execution only service. This video should not be construed as investment advice. Investments can fall and rise. Capital at risk. CFDs are higher risk because of leverage.

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  • LukePerry008 says:

    Hello,
    Great video, as always 🙂
    Could you make a video about Stochastics and MACD ?
    Thanks a lot

    • Trading 212 says:

      Hello, Luke. Thank you for dropping a comment. Your suggestion has been noted.

  • Titi Chan says:

    Man..! You are awesome.
    This is the sort teaching I was looking for. Thanks a millions.

    I had no idea how to grasp the concept of selling an item that is not at hand.

    • Matt Machuso says:

      Agreed. Awesome vid!!!

    • J Rez says:

      HAHAHAHA Me too! Thank god for this video.

  • Bhupendra Ghanghoriya says:

    the place and the setup is simply beautiful.

    • J Rez says:

      Right he has one computer lol. I can’t stand when I see one guy with over 8 computer screens lol.

  • Kofi Nyarko says:

    that was really nice… can u pls talk about price action and support and resistance.. thank u

  • Pawel Golanski says:

    Hi,
    So when you say you buy 10 of gold…what do you mean by that…like 10 onces of gold or 10 positions? and
    how do you know how much this 10 of gold are gonna cost you?
    (Im new to proper trading) Appreciate any answer, thanks!

    • Trading 212 says:

      Hi, Pawel. Gold is measured in USD per troy ounce. The margin and the result in your trading account convert into your account’s currency, if different. You can calculate the required margin per position by using the formula:

      Margin per position = Price x Quantity x Margin per instrument (listed at http://www.trading212.com/en/Trading-Instruments)

      Alternatively, you can use the web app at http://www.trading212.com to calculate it automatically. Simply log in to your trading account from a computer. Open a detailed trade box with your instrument of choice. Enter quantity. The required margin will appear in the section called “Margin and swap details”.

    • Pawel Golanski says:

      Thanks for your quick reply.

  • Andile Gono says:

    How do u get a perfect entry point???

    • Trading 212 says:

      Hi, Andile. You can take a look at this video about placing entry orders: https://youtu.be/Ig0jIgIS3ks.

    • Q*bert says:

      lol if any of us knew that,either way,hoping for up or short selling we would be billionaires. No one can time the market perfectly. If you could,men in suits would eventually be knocking on your door to ask you how you do it.:D

  • Flare Media Group says:

    MASTER!

  • Alex Harrod says:

    Hi. Do you have to have an open position on the stock first before selling?

    • Trading 212 says:

      Hi, Alex. You can sell first in order to buy later on. This is called short selling and is explained in the video.

  • Delph 017 says:

    Two questions:
    1. Selling short is about trading assets that are not necessarily mine, right? If so, than most probably whenever someone tries to, or even sells MY assets I’ll find out and do something about it. Unless I’m very careless about my stuff.
    Therefore, how do the real owners allow people to gamble with their assets?

    2. If in this case I’m the shorter and I sell someone else’s assets, is it guaranteed that I’ll be able to buy it back?
    If so, exactly what gives me that guarantee?

  • Muzicboy3 says:

    Great clear explanation for a new guy like me thanks!

  • Francis D says:

    What are typical fees for doing this kind of transaction? I’ve short sold one stock of TSLA to get a feel for it, but stupidly assumed the commission fee for it would just be a tad higher. Apparently, fees can be applied but the explanation from by broker was not so clear.

  • Jason Walker says:

    Your simple explication is perfect. Most people over think the process.

  • Matt Machuso says:

    Does this work for crypto currency trading as well?

    • Trading 212 says:

      Hi Matt. Yes, you can short sell cryptocurrencies on Trading 212.

    • Matt Machuso says:

      Great thank you!!

  • bill yongo says:

    thanks a lot man that was a great concept.

  • Seregon72 says:

    Short selling is my favorite, and the CCI is my new favorite tool to use.

    • Alfie J says:

      Where can I find this CCI tool and what is it?

  • Rick Sanchez says:

    I’ve watched some of your videos and I swear you are very informative and very helpful. You can really make someone a successful trader.

  • Celtic Whisper says:

    I really do not understand. If you have a stock that is worth $100, and you think the price will fall, you sell the stock. So you have $100 in your hand (so to speak). The price drops to $75, and you buy the stock back. So now you have $25 in your hand, and stock worth $75. $25 + $75 = $100. That’s what you started with when you sold the stock for $100. How have you made any money!!

    • Negasonic Eon says:

      Celtic Whisper No here is how short selling works I’m just going to give an example with stocks its essentially the same with other investment options (bonds, currencies, etc…), First of all when you short sell you are betting against the company (you want its stock price to fall). First step contact a broker or choose the option to short sell, tell the broker you want to “short sell x amount of shares from company “Y”. You only do this when you think its stock price will fall, if the stock price rises you will be losing money. The broker then goes through his/her stock inventory or clients portfolio and sells someone else’s shares. That money is then transferred to your “brokerage account” since you chose to short sell. So at this point you own 0 shares but you now have more money than before in your account from shares your broker sold for you. Later on you have to buy those shares back so the broker can redistribute them to his/her clients portfolio or stock inventory. For the right to borrow shares you pay the broker a fee regardless if you made or lost money.

      Example: $GNB just hit an all time high at $100 per share but based on your data and personal research you conclude the stock price will drop to at least $50per share. You personally own no stock and have a $100 account. As a short seller you call your broker or choose the option to “short sell 5 shares of $GNB stock”. 5 X $100 = $500 dollars, you don’t own any shares but your brokerage account is “credited” $500 dollars. So basically you just received an extra $500 but you don’t have any shares in your portfolio. How is this possible? Because when you as the investor choose the option to short sell the broker knows to try and find 5 shares of $GNB stock that other investors own (not you) and sell them for the current market price ($100 per share in this example). It is important to note that these other investors have not chosen to sell their shares, it was the broker who sold their shares of $GNB. Now you wait and you watch the price of $GNB as it falls from $100 to $50 per share, at this point you contact your broker again or choose the option to “cover your position” for 5 shares at $50 dollars per share. 5 X $50 = $250. YOU initially gained $500 of buying power from shares that were NOT YOURS, shares that your broker BORROWED and then SOLD, when you “cover your position” for (5 shares at $50 per share), that means you are BUYING BACK ALL 5 shares of $GNB that you NEVER OWNED your broker will take your 5 shares you just bought and give them BACK to the original owner(s) even if that means the stock GIVEN BACK is HALF of the ORIGINAL VALUE when you BORROWED it. All that matters is that the correct amount of shares is given back to the original stock owner(s).

      In conclusion theoretically your Brokerage account = $100 and you own no stock whatsoever. You have $100 dollars of buying power and you’re pretty sure the price per share of $GNB will drop to $50per share (makes no sense to buy 1 share to lose 50% of your money), you then chose to short sell 5 shares at $100 per share. Therefore, original account ($100) + $500 = $600 dollars of buying power. Stock price of $GNB dropped from $100 to $50 per share. You covered your position and bought back 5 shares at $50 per share ($250). Your Total Buying Power which is $600 – $250 = $350. So original account went from $100 to $350 dollars. At the end of it all you made $250 profit by shorting 5 shares of $GNB. YOU STILL DON’T OWN ANY SHARES of $GNB even though YOU BOUGHT 5 shares of $GNB. So your account balance is $350 and you still own 0 shares of stock. (Keep in mind the broker doesn’t do this for free, a fee is taken out of profits first and then you get the rest). So instead of $250 profit it would be $243.50ish give or take some dollars to account for different brokerages having different fee amounts.

      Also be advised that shorting is normally done by advanced traders and can be very risky. If $GNB in the example above did not drop to $50 per share but instead increased $20 per share ($120 per share) you would have no choice but to cover and buy back 5 shares at $120 per share. You will then have an account of $0 or have a negative account balance in this example. Typically the broker gets the fee before your account goes to $0, hence you end up owing your brokerage some money to get your account out of the negatives. Either way the broker will get paid whether you win or lose. The broker fee is normally at a fixed amount.

    • Otto Vanluchene says:

      That a long but clear explanation, thanks!

    • Lalchhanchhuaha Hmar says:

      Daryl Titsworth omg you really explained well, thank you so much i could understand this, i will re-read again and again im slow in understanding things and poor english, better than the broker explaination oh! 💝💟👍

    • Hugh Tierney Tierney says:

      @Negasonic Eon Thanks that was a marvellous explanation. The ‘explanation’ in the film was very superficial. It seems to me that the person whose shares were sold without their knowledge were not exactly being ‘looked after’ by their broker, unless they get some cut of the proceeds from the short sell. Is this the case?

    • Pete Jones says:

      @Hugh Tierney Tierney I think it relies on the broker, therefore you, theyvwould be under some kind of insurance

  • Pape Rone says:

    excellent explanation by all means. Thank you!

  • lima390 says:

    thanks , i could not get my head around this until i saw this vid .

  • Krishna says:

    Thank you, awesome lesson.

  • Kerrie Jaxon says:

    The bit I don’t understand when trading, is how long do you leave the trade to run for? Do you run out of time after 1hr? Or can you leave the trade to keep running for days until it goes down or up? and does it keep running until you end it?

    • Trading 212 says:

      Hi Kerrie, in relation to CFD trading, you may keep your positions open as long as you have sufficient funds on your trading account, or until the expiration date for positions with CFDs on futures contracts.

    • Kerrie Jaxon says:

      Thanks for answering my question ! 😄

  • Teresa D'Alessio says:

    Frankly, you have to qualify to borrow a share, and to short in effort to make money one must borrow a significant amount of shares, without a lot of other shareholders realizing. Basically, this demands insider information that most other shareholders dont know.

    • Paul John Bodie says:

      Why do you have to do it without a lot of other shareholdes realizing? And why does it demand insider information (can’t a trader simply evalute the market and come to the belief that the particular shares are going to go down?).

  • Ruud Lathouwers says:

    Really good video. I looked up many times on the internet wat short selling is but it didn’t get clear to me. Thank you. I finally get it.

  • South Hill Farm says:

    This explains nothing.

    • Paul John Bodie says:

      He missed out the crucial detail that the short seller BORROWS the shares to begin with. Example. I am a trader who think shares in Company X are going to go down. You are a trader who has shares in Company X. I ask you to lend me 100 of those shares. You agree, because you know and trust me, and because I pay you a fee so you profit from the deal. Let’s say the shares are worth $10 at the time you lend them to me. I then sell the shares to Bob, another trader, for $1000 (100 shares x $10). My thinking on the shares going down turns out to be correct. They plummet to $5 a share. I now buy 100 shares (from Sue, another trader) costing me $500. I give you these shares. I profit $500 (minus the fee I paid you for borrowing the shares in the first place.

  • Dean Nel says:

    This is the best teaching video by far that i watched! TY SIR

  • firdaus maulana says:

    It’s dangerous for economic environment, in my opinion it should be banned

    • Paul John Bodie says:

      Why is it dangerous?

  • E.S Anoop says:

    Hi. In Daytrading, how to select stocks for Shorting/Short selling at any point of the day?

  • knightowl50 says:

    What?

  • Lungile Madi says:

    Hi sir thanks for the video. I would like to know what exactly we are selling when we short-sell. The way I understand it, we are loaning the securities, then we sell them, and then buy them at a lower price. We then take our profit and return the assets to the owner. So is it the same concept? Are we loaning the assets from the broker and then selling them – to other traders, only to buy them back later?

  • Cal Aylmer says:

    David, David, David…..ok wait up!!!!!!!!!!!!. You started out nice and simple and I thought “ah ha! finally someones gonna explain this to me”, then all of a sudden its
    “sell 10 shares, hit sell, lose money……( at which point i stopped….) this won’t do for an explanation one bit! I need step by step from the beginning where, what why how and a whole lot more drawing on paper followed by arrows on the screen showing where we bought where we sold, how we filled in the order box, how the math works, and how we made money going down hill ???????? you TOTALLY didn’t explain it!

  • charlogne oco says:

    👍👍👍👍👍👍

  • Jules Marshall says:

    I finally understand it thanks ! I never got how I can sell something I never had

  • nick1063 says:

    Great video thanks David

  • South Coast says:

    so wait.. how did you sell something you did not have?

    • Team Voltage says:

      What I’m thinking is that when he sold he borrows the gold at the current price, then gives the gold back when it’s cheaper

  • ZhivWurm says:

    Incredible tutorial, thank you so much this helped a lot!

  • J J says:

    I liked your office. When I will make some money ..I will make it like this. Thank you for your time n sharing information.

  • Bichip-XRP Steve says:

    Sounds silly but I am new to this,How does it work so if I buy a stock ,how do I make money every year like Warren Buffett?Because I paid for a stock it’s only gone up by 0.10p So do I sell that and make 10p or how do I leave it and cash in every year like the Professionals do year in year out.

  • Jay Gatsby says:

    There must be someone on the other side willing to borrow the shares to sell in first place. How does that work? That person must be then rewarded for borrowing the shares for the duration of the short trade.

  • Arthur T says:

    What about the stop loss?

    • Matt Faraday says:

      A stop loss means you place a stop loss at a price where if it’s falling, you want to stop your losses so you say if it falls below this price, then sell. So you aren’t left with nothing and take a small loss. When shorting a stock, it’s the opposite, you say if it goes higher than X then sell and because you are shorting, if the stock goes up, you’ve lost money so the stop loss means if it goes up higher than you want you sell at the price you sepecify.

  • Nelson A. Jimènez says:

    Sir, this video is a light in the dark, i couldnt ever have found this information as undestandable as you put it on the table.
    Thank you so much, God Bless you sir.

  • Tafla says:

    You can only short sell CFD not real stocks. You might as well bet on horse racing while you are at it.

  • Lee Hobbs says:

    …I doubled my investment in 3 months by waiting for price to fall then selling high…now I find out I could have been trading while its falling?? Dammit!
    You’re great at explaining things.

  • Dan Dare says:

    Hi Dave, I understand the concept, but there is no “Sell” option on Trader 212 Tutorial. Do I need to go live? How can I practice?

  • Kevin's Journal says:

    Perfect, thanks so much!! 🙂

  • Carin Johnson says:

    If it is an ‘execution only’ service, does that mean I automatically ‘buy’ back those shares, when I exit the trade, or do I physically have to place another ‘Buy’? I really want more nuts-and-bolts advice, without the assumption that I already know a lot. I appreciate the fact that these teaching videos ARE out here, but would appreciate a lot more detail.

    • tunafish says:

      Execution-only means they can’t advise you on what to buy and sell, or when to buy and sell it. All decisions must be your own. If you don’t understand this, then you shouldn’t be short-selling anything.

  • 603spikem says:

    when does short selling become scalping?

  • Susan Bishop says:

    i am using the demo, but cannot take profit without setting yhe “take profit”. So how do you close a short without setting this as it can be a very quick trade.

  • SY S says:

    so you can’t short sell using Trading 212 invest?

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