Short selling explainer: what it means and how to use it to your advantage

Fingers on buzzers: who can explain what ‘short selling’ – also known as ‘shorting’ or ‘short trading’ – means precisely?

There is no shame in not knowing the answer to this question; many experienced and successful traders would struggle to provide a wholly convincing reply.

In essence, shorting is when a trader backs a certain market to decline. If their hunch is correct, then they will benefit.

“The inherent mindset of traders is to be positive and invest in a market when it is on the up, but you can make money when it goes down, too, by shorting,” explains Iqbal Gandham, UK Managing Director of eToro.

“If you know about shorting you should not care whether the market is going up or down, because it is possible to make money in both directions. Yet a huge number of people are not taking advantage of this strategy.”

It is crucial to understand that shorting is made possible through Contracts For Difference (CFDs), or derivatives, as they allow the trader to sell assets he or she doesn’t actually own. Simply put, a short trade is executed when a borrowed asset, or instrument, is sold at the current market price.

If the market moves the trader’s way thereafter, and the price of the asset declines, the value of their position increases. From there the trader can choose to buy back the now-cheaper asset and make a tidy profit.

Arguably the most famous example of shorting came in September 1992, when Hungarian-American investor George Soros netted approximately $1 billion after correctly predicting the British pound would drop when it was forced out of the European Exchange Rate Mechanism. More recently, in 2007, American hedge fund manager John Paulson waged against American subprime mortgage securities and generated $15 billion for his company.

All 1,200 instruments offered by eToro to its six-million-plus members offer the option to short, including within the cryptocurrency and stock markets. During the recent crypto downturn, in early September, when there was much market volatility, many traders did look to short.

The eToro platform’s multi-device, user-friendly interface, makes it straightforward for members to short markets. And in today’s uncertain world, who knows what opportunities might be around the corner? Never has the old adage ‘one man’s loss is another man’s gain’ been so apt.

All trading involves risk. Only risk capital you’re prepared to lose. The information above is not investment advice. Past performance is not an indicator of future results.