SHORTING AND CLOSING:
WHAT'S THE DIFFERENCE?

Understanding the distinction between the terms “short”, “buy”, and “close” on the eToro platform is crucial. They represent fundamentally different actions — and mixing them up could lead to unintended trades. This guide will explain the differences and what they mean.

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On the eToro platform, the terms “Close Trade”, “Buy” and “Short” refer to distinct actions. Understanding what these terms mean can help you avoid confusion and better navigate the trading process. This is what you need to know.

Understanding the Basics

Gaining exposure to a financial asset such as a stock in the way that you want involves putting the right kind of trade order into your brokerage platform. On eToro , the terms “Close Trade”, “Buy” and “Short” cover distinct elements of the trading process.

Developing a better understanding of what different terms mean on eToro gets around the issue of the financial markets being somewhere where some terms are confusingly used interchangeably. Having extra clarity about the trading actions each term relates to will help prevent you from accidentally opening positions you didn’t intend to create.

Closing a Trade

Let’s explore what happens when you select the “Close Trade” option on a position you hold on eToro and how the term closing can mean something different from selling, which in traditional investing typically means disposing of an asset you already own.

How Closing Works in Practice

Closing a trade on eToro means you’re terminating an existing investment position. When you close a position, you’re essentially exiting your investment and realising any profits or losses.

To close a trade on eToro:

• Navigate to your portfolio
• Select the position you want to close
• Click the “X” or “Close Trade” button
• The platform will show you the current value of your position and any profit or loss you’ll realise upon closing
• If you click “Close Trade” you will no longer own the asset, as you have closed out your position
• Proceeds from the sale are returned to your available balance

If you own 100 shares of EasyJet stock which is trading on the open market at £4.32 then closing your position means you’re ending your investment in EasyJet and receiving the £432.00 back to your account balance.

These examples are simplified and for illustrative purposes only; actual liability depends on personal circumstances and local laws.

When to Close a Position

The decision on when to close a position will depend on your view of the assets potential future performance, forecast market conditions, opportunities presented by other investments and your own personal circumstances. For example, you may be liquidating positions to finance a lifestyle choice.

In the case of the EasyJet example, if economic indicators suggest a downturn in the airline industry, you might close your EasyJet position to protect your capital. This might occur when your position has already reached your target price, or when the position is unprofitable and you want to avoid further losses.

Shorting an Asset (Short Selling)

When you see the “Short” button on eToro’s trading screen, it doesn’t mean selling something you already own — it’s offering you the opportunity to short sell.

The Mechanics of Short Selling

Short selling is a trading strategy where you aim to profit from a decline in an asset’s value. Essentially, you’re taking the view that the price will go down rather than up. But if the price of the asset rises, you’ll make a loss. Here’s how short selling works:

• When you click “Short” on an asset like Amazon stock, you’re opening a new position that profits if Amazon’s share price falls.
• You don’t need to own Amazon shares to open this position.
• Instead, you’re entering into a contract with eToro where you agree to the terms of a “sell” position.
• If Amazon’s price drops from $220 to $205, your short position gains value.
• Conversely, if the price rises, your position loses value.

These examples are simplified and for illustrative purposes only; actual liability depends on personal circumstances and local laws.

CFDs and Short Positions

Short selling on eToro is typically executed through CFDs . When you open a short position, you’re not actually selling the underlying asset but rather entering into an agreement with eToro about the asset’s price movement.

The amount you gain or lose depends on the size of your position and the magnitude of the price movement. It’s worth noting that short selling through CFDs often involves leverage , which will amplify losses as well as profits.

Buying an Asset (Going Long)

When you click the “Buy” button on the eToro platform, you’re taking what’s known as a long position. This is the traditional form of investing where you purchase an asset expecting its value to increase over time.

• If you buy Microsoft (MSFT) stock at $505 and it rises to $520, you make a $15 profit per share on your long position. If the price falls to $490, you record a loss.

Going long is relatively straightforward — you believe in the asset’s potential for capital growth, or expect it to generate a regular income, so you buy it.

On eToro, depending on the asset and your location, buying might give you ownership of the actual asset (like real stocks) or a CFD position that tracks the asset’s price. The platform will indicate which type of position you’re opening before you confirm your trade.

Key Differences at a Glance

Let’s clarify the distinctions between these three actions with concrete comparisons.

• Closing a trade — ends an existing position you already have, whether it’s a long or short position. You’re exiting the market and realising your profit or loss.
• Shorting — opens a new position that profits from price declines – you don’t need to own the asset first.
• Buying — opens a new position that profits from price increases – the traditional investment approach.

The key distinction is between ending a position (closing) and opening a new position (buying or shorting). Think of closing as the “exit door” for any trade, while buying and shorting are two different “entry doors” depending on your market outlook.

Practical Examples

Real-world scenarios help illustrate these concepts more clearly.

Scenario 1, “Closing”:

• You bought Tesla shares at $512.
• The price falls to $490, and you decide to cut your losses.
• You would close your position, recording a $22 loss per share.
• You’re not “shorting” — you’re closing a buy position.

Scenario 2, “Shorting”:

• You believe oil prices will fall due to increased supply.
• You don’t own any oil, but you open a short position on Oil at $80 per barrel.
• If oil drops to $75, your short position profits.
• If it rises to $85, you face a loss.
• To exit this trade, you would close your short position.

These examples are simplified and for illustrative purposes only; actual liability depends on personal circumstances and local laws.

Common Misconceptions

Several misunderstandings frequently trip up traders unfamiliar with these concepts. Many traders mistakenly believe they need to own an asset before they can short it on eToro. This confusion stems from legacy issues surrounding traditional investing terminology.

On eToro, “shorting” specifically means short selling — opening a position that profits from price declines. You never need prior ownership to open a short position.

Another common error is thinking that the “X” or “Close” button will always result in selling an asset. In reality, closing simply ends your position. If you opened a short position, closing it is actually equivalent to “buying back” in traditional terms. The close function is position-neutral — it simply exits whatever position you have open.

Final thoughts

Understanding the differences between order types on eToro is fundamental to effective trading and avoiding potential losses caused by trading mistakes. Master the distinctions between close, short and buy and you’ll be in a better position to navigate eToro’s platform with confidence and precision.

Always check the Portfolio section of your account after trading to make sure you booked your trade as intended. It’s best to rectify any errors and book reverse trades as soon as possible so that market prices don’t move too far before you correct your mistake.

Visit the eToro Academy to learn key investment terms used in the financial markets.

FAQs

Can I sell stocks I don’t own on eToro?

Yes, through short selling. When you click “Short” on eToro, you open a CFD position that profits if the asset’s price falls. You don’t need to own the asset first.

What happens to my money when I close a position?

When you close a position, your initial investment plus any profits, or minus any losses, returns to your eToro account balance. These funds become immediately available for withdrawal or to invest in a new strategy.

Is closing a trade the same as selling my stocks?

In traditional terms, yes — closing a long position is equivalent to selling stocks you own. However, on eToro, the “short” function specifically refers to short selling, while “closing” simply means exiting any position you have open.

Can I close a sell (short) position any time?

You can close a position any time that the market on which it trades is open. Some markets operate around traditional office hours, while some assets can be traded on a 24/5 basis.

What’s the difference between real assets and CFDs on eToro?

Real assets mean you own the actual stock or cryptocurrency. CFDs are contracts that track the asset’s price without ownership. Short selling always uses CFDs, while buying can involve either real assets or CFDs depending on the market and regulations.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 46% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.

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