When markets are on the decline, many traders and investors ‘sit on the fence’ and wait for them to go back up, and some even go as far as eliminating their investments. However, sometimes there’s a way to utilise the downward momentum with a more proactive approach, by opening a short sell position.
Short selling is a common practice in trading.
A simplified description of the process would be a trader ‘borrowing’ a certain asset (stock, commodity etc.) from a broker, and immediately selling it at its current price. When the asset’s price goes down, the trader buys it back at the lower price, returns it to the broker, and keeps the difference. On eToro, the entire process can be done intuitively, by clicking the SELL toggle in the trade window.
It’s called short selling because the trader is selling stocks he borrowed, meaning, he’s “short” a certain number of stocks. When planned correctly, a short position could prove to be very effective.
How short selling works
Short selling is an agreement between a trader and a broker, that can be carried out in various forms. The simplest scenario is one in which the broker lends the trader a certain asset, such as a number of a certain company’s stocks. The trader then immediately sells the stocks, and, after their price goes down, buys them back for a lower price. He then returns the assets to the broker and keeps the difference.
Of course, this is the optimal scenario for the trader, and often the transaction can prove to be less favourable. The term “short” refers to the fact that, after borrowing the stocks and selling them, the trader is now “short” a certain number of stocks.
On the eToro platform, short selling is done using a Contract for Difference (CFD). When using a CFD, the broker and trader agree to the terms beforehand and settle the difference between themselves at the end of the transaction, without the underlying asset changing hands. If the broker is licensed and regulated, they are required to give their client market conditions that reflect the actual market as closely as possible, which is why using a CFD for short selling under these circumstances does not present a conflict of interest.
Opening a SELL position on eToro
eToro strives to give its clients an intuitive interface and a smooth trading experience, which is why opening a short position can be done quite simply on the trading platform. All you have to do is open a trade, and switch the toggle from “BUY” to “SELL”:
As soon as you switch to SELL and open your trade, the position will open as a short-selling position and will increase in value as the asset’s price goes down. Remember: the SELL function does not mean that you’re selling assets out of your portfolio, but rather, opening a new position that is “short”.
Like all trading platforms, prices on eToro have a spread, meaning the BUY and SELL prices are different (the BUY price is always higher). Therefore, when closing a short position, be sure to check the BUY price on the platform, as that is the price you will receive when closing.
Once you open the position, it will appear in your portfolio as a “SELL” position:
Short selling is a powerful tool and traders should familiarise themselves with it. When adding short selling to your trading and investing toolbox, a variety of new possibilities open up for you, as you can turn a profit even when markets are down. Moreover, short selling can be used as a hedging tool, to protect yourself from some losses if a certain position backfires.
Facebook privacy scandal
Over the weekend prior to March 19th, 2018, Facebook and its CEO Mark Zuckerberg came under a lot of pressure, as it was revealed that British political consulting firm Cambridge Analytica used a third-party app to harvest and sell the data of millions of the social network’s users. Over the following 10 days, the FB stock experienced a short-term drop of more than 18%, from $184.7 to $148.6. Less than a month later, the stock already climbed back up to $176 and shortly after, broke an all time high.
Tesla car (and stock) crash
Like many other tech companies, Tesla is testing self-driving cars and has implemented autopilot technology in some of its models. On March 23rd, 2018, a Tesla car crashed, killing the driver, who was allegedly using the car in autopilot mode. When the news was made public on March 27th, the TSLA stock took a massive hit, dropping 17%, from $303.4 to $244.3, in four days. Just one week later, the stock recovered back to its original price before the crash.
Trump Vs. Amazon
On March 28th, 2018, reports surfaced that the US President has a personal agenda against retail giant Amazon, sending the AMZN stock tumbling 4.5%, from $1,494 to $1,429. Three days later, Trump took to Twitter and made public accusations against the company, blaming it for “scamming” the US Postal Service and not paying enough taxes. Following Trump’s tweet, the Amazon stock dipped an additional 3%, from $1,412 to $1,370, in one day. A month later, Amazon reported better-than-expected earnings, and its stock reached a new all-time high.
So remember: There is always a way to find market opportunities.
* Your capital is at risk. CFD trading.
* The information above is not investment advice.