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Short selling plays a vital role in financial markets, but it is often viewed negatively because it involves profiting from the losses of others, which can be seen as unethical. This notion may come from a lack of understanding and an emotional reaction to a decline in asset values. Short selling remains one of the most misunderstood aspects of financial markets today.
Find out what short selling is, why it is essential for functional markets, and how you can benefit from it, even if you have never engaged in short selling before.
Every broker can offer short selling to their clients, but not everyone has the appropriate infrastructure to enable traders to do so efficiently. Therefore, traders must carefully evaluate the available trading conditions of the broker, know what to look for, and ensure their short-selling brokers offer the necessary functionality.
Short trading brokers often facilitate short sales by ‘lending shares’ to traders commonly using instruments like CFDs (contract for difference) to allow regulatory-compliant short selling. Brokers charge a fee for the service and daily financing for the duration of the trade.
In the retail Forex / CFD industry, every trading platform is also a short selling platform, because there isn’t any real difference in going long or short on a CFD, which is effectively a derivate bet on price movements whether up or down.
The ratings shown on DailyForex.com are determined by hours of research from our editorial team into over 10 factors, including account fees, deposit/withdrawal options, regulatory status, tradable assets, and more.
Excellent swap rates on leveraged overnight positions, including positive ones.
Superb order execution statistics & price improvement technology
The ratings shown on DailyForex.com are determined by hours of research from our editorial team into over 10 factors, including account fees, deposit/withdrawal options, regulatory status, tradable assets, and more.
Complete price transparency with tick-by-tick historical data
Competitive trading fees, including low swap rates on leveraged overnight positions.
The ratings shown on DailyForex.com are determined by hours of research from our editorial team into over 10 factors, including account fees, deposit/withdrawal options, regulatory status, tradable assets, and more.
Reasonable commission-free trading fees and swap rates
Capitalise AI for code-free algorithmic trading & VPS/algorithmic trading guide.
The ratings shown on DailyForex.com are determined by hours of research from our editorial team into over 10 factors, including account fees, deposit/withdrawal options, regulatory status, tradable assets, and more.
Premium liquidity & excellent order execution
Free VPS hosting & Capitalise AI for code-free algorithmic trading.
Best all-around broker with high floating leverage and fast execution
FXTM ranks among the best short-selling brokers due to its deep liquidity, ultra-low trading fees, and full support for algorithmic trading. With 99.90% of all orders executed with an average of 0.071 seconds and 97.18% receiving an average price improvement of 0.30 pips or $3.00 per lot, FXTM maintains an excellent trading infrastructure.
Forex traders also benefit from ultra-low trading fees in the Advantage account, which features raw spreads from 0.0 pips for a commission between $0.80 to $4.00 per 1.0 standard lot. MT4 and MT5 fully support algorithmic trading, and VPS hosting ensures low latency 24/5 market access.
Pros
Excellent commission-based Forex pricing environment and transparency
Upgraded MT4/MT5 trading platforms plus proprietary mobile trading app
Quality market research and educational content for beginner traders
Proprietary copy trading platform, low minimum deposit, and high leverage
Cons
No cryptocurrencies and limited choice of
commodities
Exness offers MT4/MT5, which include algorithmic trading functions. Free VPS hosting exists for demanding traders requiring low latency 24/5 market access. The requirements rank among the easiest to achieve and maintain versus other brokers. Traders must have a minimum deposit of $500, a free margin of $100, and have trading activity over the past 14 days.
Trading fees for Forex traders are highly competitive, with commission-free minimum spreads starting from 0.1 pips or $1.00 per 1.0 standard round lot due to deep liquidity. Exness also excels with its pricing transparency, placing it among the best short-selling brokers.
Pros
Excellent
24/7 multi-lingual customer service
Multi-regulated
broker with excellent order and volume statistics
High
level of transparency and financial audits by Big Four accountancy Deloitte
Instant
withdrawals from a trusted broker with numerous payment processors
Highly regulated, choice of fixed or floating spreads
Short sellers who prefer a commission-free cost structure will find that AvaTrade ranks among the best short-selling brokers. Trading fees start from 0.9 pips or $9.00 per lot, which is higher than commission-based alternatives, but within a reasonable range. While AvaTrade shines with its choice of trading platforms, MT4 and MT5 cater the best to short sellers, as both support algorithmic trading. A complete guide to VPS and algorithmic trading is also available.
AvaTrade offers a competitive edge over many short-selling brokers due to the availability of the third-party tool Capitalise AI, which allows algorithmic trading in a code-free environment.
Pros
High-quality educational offering via SharpTrader
Excellent choice of trading platforms catering to various trading needs
Broad asset selection and cross-asset diversification opportunities
Well-regulated and trusted broker with oversight from a central bank
Premium liquidity and excellent order execution, due to the collocation of trading servers with leading global financial firms, make Eightcap one of the best short-selling brokers. The MT4/MT5 platforms fully support algorithmic trading, and free VPS hosting for low-latency 24/5 market access only requires a monthly trading volume of 5.0 lots.
Eightcap trading fees in the commission-based account are highly competitive, with average spreads on the EUR/USD of 0.06 pips or $0.60 per lot for a commission of $7.00. Adding to the competitive advantage is the third-party tool Capitalise AI. It enables algorithmic trading without the need to code.
Pros
Low minimum deposit and high leverage of up to 1:500
Competitive cost structure
Excellent technology infrastructure and seasoned management team
Short selling refers to traders borrowing shares, usually from brokers lending them at the current market price, in the hope of buying them back at a lower price before returning them to the broker. For example, a trader borrows 1,000 shares in Company ABC at $75 per share, the trader then agrees to sell the shares at this price. The price of the shares then falls to $60, and the trader buys them back at this price, returning the 1,000 borrowed shares to the lender. The gross profit is $15 per share and $15,000 on the deal.
Contrary to widely held belief, the lender has not lost money, as the share price drop is irrelevant to a counterparty initiating a short sale. Brokers often pay long-term investors for borrowing their shares. It does not apply to derivative contracts, where brokers offset positions from their internal order book, which suffices to meet demand. Only about 10% of daily trading volume consists of short selling, but it adds necessary liquidity to markets to enable more trades to be conducted at reduced cost to all participants.
What Is Naked Short Selling?
Traders entering short positions without borrowing the shares initiate a naked short sale. It is often an illegal transaction, as it creates artificial demand. Each publicly listed company has a set number of shares in circulation, which it can amend, but the total amount cannot exceed the registered shares. Since short sellers borrow shares, the transaction is legal and approved by regulators.
Naked short selling would artificially add shares, as the trader never borrows the shares. It was more common before the turn of the millennium and before technology replaced manual record keeping. OTC shares were often the victim of naked short selling, usually in pump-and-dump or boiler room schemes, both illegal practices.
What Is Short Selling in the Stock Market?
Short selling in the stock market is where traders borrow shares from their short-selling brokers if they believe a price movement to the downside is imminent. Institutional traders and hedge funds also use short selling to hedge risk, protect long-term investments, and generate short-term income.
Short Selling and its Importance in Day Trading
Short selling is paramount to day trading and benefits everyone, including those opposed to the practice, due to an uninformed opinion.
The primary reasons short selling is essential in day trading are:
Short sellers, or bears, ensure appropriate market pricing of assets.
Short selling lowers the potential for bubbles and market crashes.
The added liquidity of short selling decreases spreads, which compress trading fees for all traders.
Short selling increases the trading opportunities for other day traders, notably for scalpers. the ability to short is essential.
Traders can hedge their portfolio exposure from short term risk and adjust their overall risk profile via short selling.
Short selling assists capital formation and increases market efficiency.
Short selling Forex as a day trading strategy does not incur swap rates if you close the position before 5pm EST.
What to Look for in the Best Brokers for Short Selling
Short-selling requires a few core components that all competitive short-selling brokers shouldoffer:
Low trading fees, ideally with a volume-based rebate program
Competitive overnight financing rates
Liquid trading instruments
An innovative trading platform with clear order placing technology and support for algorithmic trading solutions.
Phone-assisted trading is a bonus.
Bottom Line
Short-selling brokers only account for approximately 10% of daily trading volume, but they benefit the entire financial ecosystem, despite their unjustified negative reputation. Short-selling brokers add liquidity and decrease trading fees for all market participants. They also ensure an efficient and well-functioning market.
FAQs
Can short selling be profitable?
Yes, short selling can yield profits if executed by a skilled trader managing a portfolio with one of the most competitive short-selling brokers with a cutting-edge trading infrastructure and low trading fees, like any other trading strategy.
Can you short sell without a broker?
Not really - it is theoretically possible to conduct a short sale without a broker, but the technological person-to-person (P2P) infrastructure does not exist except for the cryptocurrency sector, where exchanges and DeFi companies handle the deal flow. Therefore, for non-cryptocurrency short selling, a broker is necessary and ensures that both parties receive their assets and cash in a regulatory-compliant transaction.
How do short-selling brokers make money?
Short-selling brokers make money by charging a fee for facilitating the short transaction, a commission for the transaction, and the spread of the asset. They may also look to make a markup on overnight trade financing.
Why is short selling restricted in the stock market?
Restrictions on short sales in the stock market depend on the regulator, and they hint at a dysfunctional market, as short selling remains vital for market stability and accurate pricing. Regulators often fail to realize their interventions are counterproductive. For example, the short-selling restrictions on financial stocks during the 2008 financial credit crisis accelerated selling pressure, drained liquidity, and magnified eventual losses. Regulators hoped to prevent a more significant downward spiral, but their actions fueled the move.
Who are the biggest short sellers?
Institutional traders and hedge funds are the biggest short sellers.
Who loses in short selling?
Nobody loses money in short selling except for the trader who initiates the short position if the price moves higher and they realize the floating loss by closing the trade.
How do I start short selling?
If you are trading CFDs, you just open a short position as you would a long position. If you want to short actual shares which you own, you must borrow shares from your stockbroker to begin a short sale. The availability of shares for short selling depends on the access and interconnectivity of the broker across the financial system. Brokers that cater to institutional clients have the most competitive short-selling conditions, but smaller retail brokers offering highly liquid assets can efficiently facilitate short sales across their internal order book.
How long can I short sell for?
There are no time limits in short selling, but traders must pay financing fees for the duration of the short sale. Therefore, the longer a short position remains open, especially if unhedged, the higher the costs and the lower the profit potential while also increasing the risk. Short selling is ideal for ultra-short term to short-term trading strategies or as effective hedges for long-term portfolios if executed appropriately.
The DailyForex.com team is comprised of analysts and researchers from around the world who watch the market throughout the day to provide you with unique perspectives and helpful analysis that can help improve your Forex trading.
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