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How to short a stock: shorting in the UK

Many investors and traders profit from bullish stock markets. They invest in companies they expect to grow based on optimistic views. However, some dealers attempt to profit from declining share prices, struggling businesses and market crashes. These dealers prefer to profit from negative market sentiments, such as a bear market.

There are various ways to short a stock. In this article, we investigate how to short a stock via leveraged trading, and key signals when deciding what stock to short. Shorting stocks is more complex than trading based on optimistic market attitudes. Therefore, it is important to understand how to short sell and the implications of doing so. Sign up for an account to get started.

What does shorting a stock mean?

Most investors aim to benefit from stocks or shares that are forecasted to have the potential for future growth and development. However, shorting stocks is a trading technique that involves profiting from the decline of a company’s share price.

Traders who follow conventional trading strategies are usually looking for markets that are becoming more relevant or companies that are outperforming the market average. However, stock shorters do the opposite. They look for shares that are underperforming in the market or shares that could become less relevant in the near future.

How to short a stock in the UK

  1. Choose your product. Decide whether you want to short stocks with our spread betting or CFD leveraged trading accounts. See the differences between CFDs and spread betting if you are not sure which to choose.
  2. Find the right stock to short. Make use of our news and analysis section to inform yourself of market turbulences that could precede stock crises. Also, our fundamental analysis resources could help you determine which companies are likely to struggle.
  3. Manage your risk. Before you place a trade, make sure you have adhered to suitable risk-management strategy. Read more on managing your risk.
  4. Go 'short' and sell. Choose a position size in line with your trading strategy and place a 'sell' order ticket request for your chosen stock.
  5. Monitor your position. See whether your prediction was wrong or correct and take the necessary steps afterwards to either buy back the shares at a higher or lower price, and profit from the difference.


Get started with by opening a live account. Our leveraged trading accounts are also available as a demo account in a risk-free environment for all customers, where you can practise trading with £10,000 of virtual funds.

How does shorting a stock work?

Unlike most traders who like to buy low and sell high, these types of traders adapt the order of this philosophy and aim to sell high and buy low. Shorting stocks is a complex topic, and there are many things to be mindful of. A stock can be shorted in two ways, with a traditional brokerage or a leveraged trading provider, which are explained in more detail below.

Traditional brokerage

When shorting a stock via a traditional broker​​, traders borrow shares they do not own. These shares are usually lent from their financial broker. The trader then sells the borrowed shares at market value. The trader aims to repurchase the same shares at a lower price and return the shares to the lender. If the price of the stock drops, they will profit from the difference in price between the rate they borrowed at, and the rate they repurchased the shares.

This method does come with some caveats, but namely that it is up to the broker to decide if the share can be shorted. However, say that you can find a broker to lend you a stock to short, you will most likely have to pay borrowing fees as well as any dividends paid by the borrowed stock. Given the costs and the complexity of the strategy, it is often recommended for experienced traders. There is, however, a more accessible way to short stocks, known as leveraged trading.

Leveraged trading

When traders short via leveraged trading​, they do not own the underlying stocks. Spread betting and CFD trading are two types of leveraged trading with many similarities and some unique differences. However, both products offer the trader an opportunity to take a ‘sell’ position on shares and profit from stock price downfalls without the need to borrow physical stocks. With leveraged trading your profits and losses are magnified by your leverage ratio.

Spread betting

Spread betting​ is a popular form of leveraged trading which is available only in the U.K. and Ireland. Spread betting involves traders placing a bet on which direction they think the stock market will move. This method of leveraged trading provides an efficient method to short a stock without having to wait to borrow stock. Additionally, spread bet profits are commonly tax-free*. However, the spread is a key cost when shorting stocks via spread betting. View our competitive spreads​ across thousands of stocks and ETFs here.

CFD trading

CFD trading​ is an alternative to spread betting and is the most popular method of leveraged trading. CFD trading is available globally, providing an efficient method to short stocks from most countries. Similar to spread betting, CFD traders speculate whether they believe the market will fall or rise, receiving profit for correct speculations and incurring a loss for incorrect predictions.

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How to find stocks to short

Finding the right time to short a stock can be the difference between good and bad short selling. Generally, it is dependent on a trader’s strategy to find effective market entry and exit points. Our guide to stock market trading hours​ will also help you to determine the right time of day to place a trade. Most traders will use a combination of strategies to determine when they will enter the market, but it varies distinctly between technical analysts and fundamental analysts.

Technical analysis

Technical analysts could short a stock based upon what direction the general trend is heading. Using simple trend line indicators, technical analysts would analyse the trend direction of a share or stock. If the trend showed no signs of slowing down, it would present a key opportunity for technical analysts to ride the trend downwards.

Technical indicators such as the simple moving average​ (SMA) or exponential moving average (EMA) can provide key insight for technical analysts. Stocks that drop through prominent support points or fall below major moving averages (e.g. 200-day moving average) may continue on a descending trend.

Fundamental drivers

Missed earning reports suggest that there could be upcoming changes in the market. If a company profit does not meet profit estimations, it is likely to be underperforming in certain areas. This could cause a large number of investors to start shorting the stock. However, it is often best to look beyond just earning reports, as a company may be underperforming for reasons that do not impact its stock price.

Declining industries provide another opportunity. Industries that have experienced a general downtrend due to innovations in other markets or negative client sentiment can cause a particular stock’s price to plummet. This can also be affected by political and economic events such as presidential elections and trade wars. When an industry is perceived as obsolete, companies in that competitive space can be left with dwindling growth prospects, causing short traders to take advantage.

Overvaluation is a common factor that can cause sellers to come together. Stocks that are constantly covered in the news can cause the price to hyper-inflate relative to the stocks actual value. Once the stock market bubble bursts, shorters will come together knowing that the stock is not worth its current market value.

However, please note that a stock’s fundamental values are not sole determinants of its price. There are various factors to consider when shorting a stock, and these factors form a complex picture. Each trader should do their own research when considering to trade stocks.

Example of shorting stocks

For example, let us say that you wanted to short the popular US stock​ Apple (AAPL) via CFD trading.

Apple is currently trading @ $300.

You open a position to “sell” 10 share CFDs @ $300. Your total market exposure is now $3,000.

CFDs are leveraged, meaning you only need to pay a deposit of the full trade amount to open the trade. The margin rates for shares are 20%, meaning you have to deposit $3000 x 20% = $600 margin requirement.

A profitable trade

The market has fallen as you predicted. Apple is now worth $250.

You close your position with 10 share CFDs @ $250. You take away $2,500.

Your total trade value was $3,000, but it is now worth $2,500, a $500 profit*.

An unprofitable trade

The market has risen, opposite to your predictions. Apple is now worth $325.

You close your position with 10 share CFDs @ $325. You take away $3,250.

Your total trade value was $3,000, but it is now worth $3,250, a $250 loss*.

Benefits of shorting a stock

  • Hedging risks. Shorting to offset the risks of other assets in your portfolio is a known strategy for savvy long-term investors. Hedging your other positions by shorting can reduce your overall risk exposure. Say, for example, you purchased some shares in Google and intended to hold them for 10 years to profit from the companies expected growth. If any short-term disruptions impacted the rising trend of Google share price and it started to fall, you could hedge your investment position by shorting the stock. This way, any losses that exist for Google's shares can be reduced by the profits of the short position.

  • Opportunity. Most financial markets are volatile and sensitive to external forces. Having the opportunity to take a position on both sides of the market can be more useful than only having access to buying opportunities.

  • Market crashes​ and recessions. Shorting is a form of short-term trading​ that provides one of the few opportunities to profit from declining markets and recessions. Without having the ability to short a share, profit opportunities would be limited to periods of market growth.

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Risks of shorting a stock

  • Limited profit and unlimited loss. When shorting a stock through a broker the maximum profit you can make is limited as a stock cannot surpass being worthless. Additionally, losses can be hypothetically unlimited as there is no limit to a rising stock price. However, when leveraged trading, the use of stop-loss orders can be used to manage this risk.

  • Short squeeze. When a group of stock shorters make an incorrect decision to short a stock, they can panic and sometimes buy back the stock they were shorting. This increase in market activity can cause buying pressure that pushes up stock prices. Losses are realised when the market turns in the opposite direction of what they suspected. This process is referred to as a stock squeeze.

How to make money selling stocks short

Shorting a stock can provide a great opportunity for many traders, as being able to play both sides of the market increases the chance of finding markets that match your trading strategies. Additionally, the ability to short a stock via a leveraged trading product provides a more streamlined process in comparison to conventional methods to short a stock.

When learning to short a stock, you must take into account the risks that arise with leveraged trading. Features such as guaranteed stop losses and negative balance protection can be particularly useful when attempting to mitigate your risk exposure. These features can provide a larger margin of error in comparison to conventional shorting. Visit our guide on risk-management​ for more information.

View our article on undervalued stocks​ for more strategies that can be applied to trading stocks and shares.

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FAQs

What are the best stocks to short?

Traders may decide to short a stock if they think it’s overvalued or its share price will decline, so they are aiming to sell high and buy the stock back later at a lower price. Learn more about stock trading strategies.

What is short selling?

Short selling is a trading strategy that aims to profit from the decline of an asset’s price. These types of traders reverse the usual method of buying low and selling high by taking a sell position and profiting from price falls. This technique can be applied to many financial markets, including shares.

Can you short any stock?

Most of the stocks available through our online trading platform can be shorted. It can depend on the liquidity and volume of the specified stock. Search from our instruments page to view the trading details for specific instruments.

What are the risks of shorting a stock?

When traders make a mistake on the stock that they are shorting; for example, say a company unexpectedly releases a positive earnings report, it could lead to traders moving to re-purchase the stock at high volumes. This would increase buying pressure and subsequently, the share price, resulting in losses. View our trading risk-management guide for more information on how to prevent trading losses.

How do stock shorters make money?

When shorting stocks, traders are betting that the stock they sell at market value is due to decrease in price. For example, a trader sells a stock for $100 before a market crash, leading the share price to fall to $70. The trader can then re-buy the stock at a lower price, making a profit of $30. See more stock trading examples.


*This does not consider the commission charges. When trading shares via CFDs a commission cost is incurred, read our article on CFD commissions for more information.
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