Short Selling Conditions

Traders are not always able to short any asset they want, whenever they want. As there are some rules and conditions which restrict in stock markets. Investors also need to ensure high margin requirements and extra fees while shorting in stock markets. Meanwhile, nowadays CFD markets make it possible to sell short without any on top restrictions and rules.

Short selling: costs

When shorting an asset, one needs to be aware of some extra costs. Most brokerages, for instance, charge fees or interests to lend the asset. Also, if the company pays a dividend between the times one borrowed the stock, and when s/he returns it, investor must pay the dividend out of his/her pocket. Trader is responsible for the dividend payment, even if s/he already sold the stock and didn’t receive it.

There are high margin requirements for short traders in stock markets. Investors must hold 100% of the security’s current market value on their account. This is the cash one receives from the initial short sale, plus, any increase which may have occurred to date. Because there is a liability attached to the receipt of the cash, investor is not authorized to spend it.  On top of that an investor must also hold 50% of the initial value of the short asset in cash and/or imaginable securities if the strategy doesn’t develop as planned. This means one will typically need to have the equivalent of 150% of the asset’s value on hand at any time to help cover the risks.

Short selling: risks

Shorting can be a risky strategy for investors. Trader faces unique risks associated with shorting.  First is the market risk, which means the asset price may increase, and investor may lose. Trader is also at a risk of a company taking a corporate action while s/he is shorting assets. While shorting, unlimited risk of loss may occur in case if the trend goes up. 

Short selling: restrictions

Short selling on stock markets is regulated by some rules and restrictions in an attempt to slow down sharp declines in certain asset's values. For an example:

  • In the USA, a stock is eligible for short sale only if the last price movement is positive. This is called the uptick rule. This rule implemented to limit the volatility of fluctuations on the market.
  • Another rule prevents the brokers/dealers from investing into the proceeds of short sales in other positions. This rule states that the brokers can create only a limited amount of leverage.
  • In the UK stock market, instead of uptick rule, the leverage is limited using the capital adequacy norms. Since the capital of a company is limited, there is a limit on the total risk and the degree of leverage.

Thus, unlike going long, a number of rules restricts which assets may be shorted or there are necessary conditions for shorting in stock markets. This means traders are not always able to short any asset they want, whenever they want. However, nowadays CFD markets make it possible to sell short without any on top restrictions and rules. Doing short trade by using CFD's trader is using the same leverage and margin as in case of long trading. Financial brokers get advantages of better leverage and margin conditions by utilizing electronic trading method. Using GeWorko method investors can analyze assets with ease and comfort, find both bad and good assets, make technical analysis accordingly and create an effective portfolio combining short and long trading strategies.

Thus, integrating CFD markets with GeWorko Method IFC Markets offers a great opportunity to create an effective portfolio using advantages of short trading, without any extra fees and restrictions.