How to short sell bank stocks and ETFs

What does short selling mean?

Short-selling or selling short is a way to take advantage of falling markets. If you believe a stock or ETF is going to decrease in value, you can open a short position where you essentially sell the asset at the current market price with the view of buying it back cheaper at a later date.

If you’re correct and the stock/ETF price goes down, then you’ll profit, but if the price goes up you’ll make a loss.

Whilst there’s no official time limit on holding a short position, if the stock rises, there’s no guarantee it will ever drop to the price you sold it at.

If you short sell using leveraged products, then your position will be opened with margin. This means you put down an initial deposit which is a fraction of your trade size to open a position.

If the market moves against you, your provider may issue a margin call where you’ll have to pay extra to keep your position open. Failure to do so is likely to lead to your position being closed and potential losses being realised.

What moves the price of bank stocks and ETFs?

As with most markets, the price of bank stocks and ETFs are influenced by supply and demand. The more demand, the higher the price, and vice versa.

Factors that influence the supply and demand of bank stocks and ETFs include:

• Market sentiment- If people feel positive about the financial sector they’re more likely to buy into it and prices will rise as a result
• Risk- the risk associated with interest rates, government regulation and whether or not borrowers can repay their loans, all impact people’s confidence of the sector which in turn impacts the stock price
• Interest rates and inflation- generally speaking, high interest rates are usually good news for the banking sector as it often leads to larger profit margins. But if inflation remains high and rates go up too much it can slow the economy down leading to a recession where banks tend to suffer
• Earnings report- a good or bad earnings report can impact market sentiment and in turn the share price
• Number of traders looking to invest in the sector

Should I short-sell bank shares and ETFs?

Banking shares are seen as cyclical, meaning they tend to underperform during periods of recession. With the lack of economic growth coupled with high inflation and interest rates, the economy has hit a rough patch and it’s impacted banking shares and ETFs.

Since the collapse of Silicon Valley back in March, stock and ETF prices of small and mid-sized banks have been more volatile than usual, creating opportunity for short sellers looking to take advantage of bear markets.

With interest rates continuing to rise, market sentiment towards small/mid-size banks has become increasingly negative and the number of short sellers has risen.

Despite this, many experts claim this does not fully reflect the market and investors are trading from a place of fear, partly due to misinformation on social media which doesn’t fully correlate to the fundamentals. As a result, healthy banks are seeing their stock price drop.

Why would you short bank stocks and ETFs?

One of the main benefits to shorting stocks and ETFs is that it enables you to take advantage of falling markets and if judged correctly you can benefit from them.

It also allows you to hedge against any existing positions. If you have a long position on a stock but you believe that in the short term it’s likely to drop, you can open a short position to minimise your losses. Once the bear market ends, you can close your short position, whilst maintaining your long one.

Risks of going short

Going short exposes you to higher risk than simply buying shares (going long). Even if the stock drops to 0, when you go long you can never lose more than you put in, but with short selling the asset could rise indefinitely so your losses are unlimited. Because of this, it’s important to constantly monitor your position and take steps to manage your risk at all times.

There’s also the chance you could get caught up in a short squeeze where the price rises rapidly, and you’re forced to buy back at a much higher price. The more short sellers involved, the higher the risk as the more people buying, the more the stock rises.

How to short bank stocks and ETFs

1. Research the market and decide which stock or ETF you want to sell short
2. Open an account
3. Open a position and sell the stock or ETF you want to short (or buy in the case of inverse ETFs)
4. Monitor your position

When you go short with us, you’re likely to use a spread betting or CFD account.

These products are leveraged, which means you open a position with a deposit that is a fraction of the total trade size. This means you could lose or gain money faster than expected. You could even lose more than your initial margin.

You can also short shares on the spot market by borrowing the share you wish to short from a broker, immediately selling it and buying it back at a later date when hopefully, the price has dropped. With this method, there’s always the possibility that there isn’t anyone to lend you the stock to sell. With an unborrowable stock, your desired trade may not be possible. Because of this, shorting via derivatives can be seen as a better option.

Buying inverse ETFs is another way to profit from falling markets. These funds move in the opposite direction to the underlying market. So if the market were to fall, the fund would rise and vice versa. For short-term trades, they can be a good option.

Learn more about choosing the best trading platform for you.

Best bank stocks and ETFs to watch

Bank stocks:

Learn more about how to trade or invest in stocks

ETFs:

When trading or investing ETFs with us, it’s important to make sure the assets name includes the word UCITS, which indicates the EFT follows a set of safety regulations which minimise the investors risk.