What is Shorting? A quick Short Selling guide on eToro

Unlock the power of short selling to profit from declining markets or hedge your investments. This comprehensive guide will walk you through the concept and its execution on the eToro platform.

📉 What is Short Selling?

Short selling, also known as going short or shorting, is a trading strategy where traders profit from a decline in the price of a financial instrument. This approach is generally used to benefit from declining markets or for hedging purposes. It’s the most straightforward application of the basic “buy low and sell high” notion, but with a twist: traders sell high first and buy low later.

💡 How Short Selling Works: A Simple Example

Consider an example of a stock for simplicity. Let’s suppose that you anticipate a fall in its price from $100 to $80 because it is overvalued. How could you profit from this?

1. Borrow the share from your broker and sell it at the current price of $100, pocketing the $100 in cash.
2. Wait for the stock price to drop to $80.
3. Buy the share back at the new lower price ($80) and return it to the broker.
4. Keep the difference ($20) as your profit from the short selling transaction.

This simple transaction is an agreement between a broker and a trader in short selling. The broker lends the trader an asset, the trader sells the asset, and then repurchases it later to return to the broker.

🛡️ Short Hedging: Protecting Your Long Positions

In a portfolio, going short on some assets may be useful for hedging (protecting) long positions in assets against the risks of a downside price movement. This process is often called short hedging.

⚠️ The Risks of Short Selling

It’s essential to understand that the success of a short selling strategy depends on your ability to repurchase the borrowed shares in the future at a lower price. However, stock prices can be highly volatile, and your predictions or estimations might not always be accurate. If the price continues to rise instead of falling, there may be no limit to the losses on your position. As a trader, you must diligently research the asset you’re trading and continually monitor open positions to minimize potential losses.

📈 Short Selling on eToro

Short selling on the eToro platform is done using CFDs (Contracts for Differences). You can choose the level of leverage and the value of stop loss for your trades. CFDs are popular instruments for trading stocks, currencies, cryptocurrencies, indices, and commodities worldwide due to their flexibility and the leverage they offer.

🌐 CFDs: No Exchange of Actual Assets

When using a CFD, the terms of the transaction are agreed upon beforehand between you and eToro. After the trade is complete, the difference is settled. In this way, there is no exchange of the actual asset during the process. As the eToro platform is regulated by multiple authorities, the conditions of such contracts reflect the actual contemporary conditions of the market, ensuring that the interests of both parties do not conflict.

💸 Spread: eToro’s Commission

Remember that when short trading, there is a spread (the difference between the Buy and Sell Price) to account for. The spread incorporates the commission eToro requires for the trade. Be sure to check the Buy price of the asset, as that is the price you will receive when the position is closed.

🔍 A Note of Caution: CFDs are Complex Financial Instruments

Keep in mind that CFDs are complex financial instruments that can amplify your losses the same way they amplify your gains due to the leverage involved. Make sure you understand the basics of trading with CFDs and leverage before you risk your actual capital.

🔧 Short Selling vs. Selling a Stock: Clearing the Confusion

Many traders are often confused between short selling and selling a stock. When you open a short sale position, you’re not actually selling any assets in your portfolio. Short selling using CFDs involves entering an agreement with the broker, where you settle the difference in prices at the opening and closing of the position without actually exchanging the underlying asset.

🏁 The Road to Short Selling Mastery

By now, you should have a solid understanding of short selling and how it works on the eToro platform. With this knowledge, you can trade more confidently and make informed decisions. Remember to consider the risks, stay updated on market trends, and continuously refine your trading strategies. Best of luck, and happy trading! 🚀

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GENERAL RISK WARNING

• ▸eToro is a multi-asset platform that offers: Stocks, Crypto assets, and CFDs.
• ▸CFDs are complicated and can make you lose money quickly because of leverage. 77% of retail investor accounts lose money when trading CFDs with this provider. Think about if you understand how CFDs work and if you can afford to take the risk of losing your money.
• ▸Past performance is not an indication of future results. Trading history presented is less than 5 complete years and may not suffice as basis for investment decision.
• ▸Copy Trading does not amount to investment advice. The value of your investments may go up or down. Your capital is at risk.
• ▸Cryptoasset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
• ▸eToro USA LLC does not offer CFDs and makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared by our partner utilizing publicly available non-entity-specific information about eToro.

Be warned!

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Author & Expert Trader - Financial Analyst :

My name is Bart Bregman and I am a full-time professional trader with nine years of experience. I specialize in shorter-term trading using technical analysis, and I have extensive experience with Stocks, CFDs, Options, and Crypto trading. I believe that there is no such thing as a bad trade. I'm currently traveling the world as a digital nomad trader. You can follow my journey on Instagram at https://www.instagram.com/bart_bregman/