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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
 Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

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Short-selling definition

What is short-selling?

Short selling is the act of selling an asset that you do not currently own, in the hope that it will decrease in value and you can close the trade for a profit. It is also known as shorting. Short-sellers tend to use this strategy as a method of speculation or as a way of hedging downside risk.

Short selling strategies can be carried out via a broker, but it is a complicated method, which means that it can be difficult to find a broker willing to lend you the shares to sell. This is why derivative products such as CFDs and spread bets are becoming an increasingly popular method of short selling.

Learn about the benefits of spread betting

Short selling is just one of the benefits of spread betting, discover more.

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Example of short selling

Let’s say that the shares of company ABC are currently trading at £75, but you believe that they are going to decline in value and decide to short sell the stock. You borrow 100 shares of ABC from your broker and sell them on the open market.

Over the next week the market drops significantly down to £40, so you close your short position and buy back 100 shares of ABC at £40 each.

You calculate the difference between the price of the shares when you borrowed them (75 x 100 = £7500) and the price that you re-bought the shares for (40 x 100 = 4000), which gives you a profit of £3500 – excluding any costs your broker may charge.

However, if you had been incorrect and the market had continued to rise, your potential risk is infinite. Because you have borrowed the stock, your broker may ask for them back at any time and you would have to close out your position at a loss.

Pros and cons of short selling

Pros of short selling

Short selling means that you have the opportunity to profit from markets that are declining in value, not just ones that are increasing.

Short selling can be carried out in a variety of ways. The example above demonstrates the traditional method of short selling via a broker, but traders will define short selling slightly differently to investors. Thanks to the rise of online trading and derivative products – such as CFDs and spread bets – traders can take a short position on thousands of markets without having to borrow the underlying asset.

Cons of short selling

Short selling can be a risky strategy, as assets can theoretically increase in value indefinitely. Leveraged products can increase risk further, amplifying losses when a market is heading upwards in price.

A good risk management is key when short selling, using tools like guaranteed stops to prevent excessive losses. Using a guaranteed stop on the IG platform will incur a fee if the stop is triggered.

Learn more about how short selling works.

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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money. 

Professional clients trading spread bets and CFDs can lose more than they deposit.

Options and futures are complex instruments which come with a high risk of losing money rapidly due to leverage. They’re not suitable for most investors. Before you invest, you should consider whether you understand how options and futures work, the risks of trading these instruments and whether you can afford to lose more than your original investment.

Trading stocks and shares ‘on margin’ within a US options and futures account – meaning that you only finance part of the cost of acquiring a position in a security – carries additional risks over buying securities on a fully funded basis and may result in losses exceeding your original investment. Trading on margin will also result in additional costs to you as the investor and any securities purchased using margin may be held as collateral by the lender, restricting both your rights as shareholder, and your ability to use the securities until the margin trade is closed. You should familiarise yourself with these risks before trading on margin.

The value of shares, ETFs and other ETPs bought through a share dealing account, a US options and futures account, a stocks and shares ISA or a SIPP can fall as well as rise, which could mean getting back less than you originally put in. Past performance is no guarantee of future results. Some ETPs carry additional risks depending on how they’re structured, investors should ensure they familiarise themselves with the differences before investing.

Share dealing and IG Smart Portfolio accounts provided by IG Trading and Investments Ltd, CFD accounts and US options and futures accounts are provided by IG Markets Ltd, spread betting provided by IG Index Ltd.   

IG is a trading name of IG Trading and Investments Ltd (a company registered in England and Wales under number 11628764), IG Markets Ltd (a company registered in England and Wales under number 04008957) and IG Index Ltd (a company registered in England and Wales under number 01190902). Registered address at Cannon Bridge House, 25 Dowgate Hill, London EC4R 2YA. IG Markets Ltd (Register number 195355), IG Trading and Investments Ltd (Register Number 944492) and IG Index Ltd (Register number 114059) are authorised and regulated by the Financial Conduct Authority.   

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