Most people’s first idea of making money in markets is straightforward: buy something, wait for the price to rise, then sell it for more. Short selling turns that idea on its head. It is a way of aiming to profit from a falling price, and while the concept is simple once explained, the risks are different enough that every beginner should understand them before trying it.
The basic idea
Short selling means selling something you do not own, with the aim of buying it back later at a lower price. The difference between the price you sold at and the price you buy back at is your profit or loss.
In traditional share markets, short sellers borrow shares from a broker, sell them, and later buy them back to return to the lender. If the price has fallen, they keep the difference, minus costs. If the price has risen, they have to pay more to buy the shares back and take a loss.
How it works with CFDs and spread bets
Many UK retail traders go short through contracts for difference or spread bets rather than borrowing shares directly. With these products you are not buying or borrowing the underlying asset. You are simply taking a position on whether its price will rise or fall, and opening a short position is as easy as opening a long one.
That convenience is useful, but it also means it is easy to go short without fully appreciating the risks. Our guide to what a CFD is explains how these products work and how leverage affects them.
Why traders go short
To express a negative view. If a trader believes a share, an index or a currency is likely to fall, a short position lets them act on that view.
To hedge. Investors who own shares sometimes take short positions in a related index to offset some of the risk of a broad market fall, without selling their holdings.
To trade both directions. In currency markets, every trade is effectively both long and short, because you buy one currency and sell another. Short selling in other markets gives traders similar flexibility.
The risks that make it different
Losses can be larger than expected. When you buy, the most you can lose is what you paid, because a price cannot fall below zero. When you are short, there is no natural limit to how high a price can rise, so the potential loss is, in theory, unlimited.
Short squeezes. If a heavily shorted share starts to rise, short sellers may rush to buy back their positions, which pushes the price even higher. These squeezes can be sudden and severe.
Costs over time. Holding a short position can involve borrowing fees or overnight financing charges, and short sellers of shares may have to pay the value of any dividends.
Fighting the trend. Markets have historically tended to rise over long periods, so short positions often work against that backdrop. Trying to call the top of a market at a record high, as some traders are tempted to do with US shares at the moment, can be an expensive habit if the move continues.
Managing risk on short trades
Because losses on a short trade can grow quickly, risk management matters even more than usual. A clear stop-loss level, decided before you enter, defines the point at which you accept you are wrong. Our explainer on why beginners need a stop-loss covers how to approach that.
Position size should also allow for the possibility of a sharp move against you, including gaps when markets open after news. Leveraged short positions that move the wrong way can also lead to a margin call.
Is it right for beginners?
Short selling is a legitimate and widely used tool, and understanding it helps you make sense of how markets work. For beginners, though, it is worth getting comfortable with risk management on simpler trades first, then approaching short positions with small sizes and a clear plan.
If you would like an honest view of how ready you are for different types of trading, our free trader assessment can help you see where your strengths lie and what to work on next.
