Short Selling In Australia: How To Short Sell or Be “Short” The Australian Market
The idea of making money when a market is falling has been around for centuries, and the stories of great traders, from Munehisa Homma to Jesse Livermore to William O’Neil making money as a market falls are both entertaining and educational.
The term for wanting to make money as a market falls is to be “Short”.Â The opposite of this is to be “Long”, which means you are banking on the market rising instead.Â The majority of market participants trade mostly on the Long side.
Using Contracts or Synthetic Instruments
Typically to be “Short” in the stock market (or any market), you either need to trade a synthetic instrument or short sell the stock itself.Â First, let’s look at the synthetic instruments.Â There are three main types of synthetic instruments you can use to be short the market:
- A “Contract For Difference” or CFD
- A Futures contract over a commodity like Gold or Wheat, or
- An Options contract over a stock or commodity.
Contracts for difference (CFDs) are fairly popular in Australia, and they are what they sound like – a contract made between you and the market maker that allows you to make a profit or loss based on the difference in price.Â Typically you pay interest on any long positions you hold overnight, and they pay you a smaller amount of interest on any short positions you hold overnight.Â Similarly, you pay dividends on your short trades, and on your long trades they pay you.
Next is Futures contracts, whichÂ have been around for decades and decades and started with farmers wanting to lock in their prices for wheat, cotton, sugar and so on.Â Now Futures contracts are traded on many other things, like metals andÂ currency.Â Typically they expire each quarter and must be “rolled over” if you want to keep your position going.
Last is Options, where buying a “Put” optionÂ will typically give you a contract over 100 shares to profit if the price falls.Â You don’t ever have to exercise that contract, but it gives you the “option” to if price moves in your favour.Â Options contracts also have an expiration date, and the value of your Option typically falls quickly during the last month to expiration.
To be Short a stock, you could also sell a Call Option (i.e. you are selling someone else the option to buy a share at a certain price, hopefully above where the stock is now).Â I do NOT endorse selling options however, as your risk is not limited andÂ can escalate very quickly if the market moves against you.Â When you buy an option, your Risk is limited to the cost of that option (plus brokerage) only.Â And when you know your risk and can sleep soundly at night, you are one step closer to being a consistently profitable trader.
Short Selling A Stock Directly
Short selling is becoming increasingly rare in Australia, despite being around and widely used in the United States for over a Century.Â However, there are still brokers that can arrange a short sale for you.
First let’s look at the mechanics of a short sale.Â Do do this, your broker needs to eitherÂ own the stock itself or have access to large holders of the stock you wish to short.Â This is because to short sell a stock you sell the stock to open your position, so the broker must either borrowÂ the stock from someone else or own it already.
In other words, instead of buying a stock to open our position we want to make money on the downside, so we sell first (to open) and buy back later (to close our position), hopefully after the stock has fallen.
You can ask your full service broker if they arrange short selling on Australian Stocks.Â Macquarie Prime is an online broker who allows short selling on a limited list of stocks as well.Â If you are using Macquarie Prime, you must be aware of the of the nuances its platform holds, and:
- Only short sell stocks that are on their short selling list (found at their site)
- If setting a contingent order (i.e. if price goes below a certain level), you must make it a “Limit Order” when triggered
- And a “Day Only” order when triggered.
Or, if you have the time during the day, you can always call them up directly, find out if you can short the stock and place the trade over the phone.
Places You Can Place A Short Trade
Apart from Macquarie Prime, you can use Options via Comsec, E*TradeÂ or a full service broker.Â You could also use a CFD provider, however I personally would only use a Direct Market Access (DMA) CFD provider.Â DMA means that the price follows exactly the underlying stock.Â If it is not DMA, typically it is a market maker scenario, where a market maker sets the prices and the bid / ask spreads, and can trigger your stop losses easily enough to get you out of a trade when they like.Â At least, that’s the story I’ve heard from most traders who’ve used a market maker type setup.Â You may have found differently, and I respect that.
I hope you’ve enjoyed this short introduction to Short Selling on the Australian stock market.Â If you want specific tools and methods for finding stocks to trade short, check out our Stock Market Plans, CoursesÂ and Tools section.Â The Complete Video Course has been described by many students as the best they have ever experienced, and it is a fraction of the cost ofÂ other education.
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