How to short sell in the Stock market on eToro?

How to Short Sell in Stock Markets?

Until not so long ago, when someone wanted to invest, they had to buy an asset, wait for its price to rise, and sell it to obtain the profit between the purchase price and the sell price.

Something easy to understand, but that offered little versatility to investors when putting together their operating strategy.

All this changed forever with the arrival of modern trading platforms such as eToro, which have started a true revolution in the way of obtaining profits by investing in stocks and in all kinds of financial products.

Next, we are going to explain one of the new ways to succeed in the financial markets: short selling, also known in financial jargon as short selling.

Go to eToro Official Website

What is short selling?

Selling short is to sell an asset when its price falls.

It is one of the main forms of financial speculation since it involves the sell of an asset with a view to its subsequent repurchase at a lower price.

Many investors buy an asset, wait for it to appreciate, and then sell it to make a profit.

Well, in the case of selling short, the exact opposite happens.

When an asset is depreciated, we may make a profit. Some great tycoons, like George Soros, made multi-million dollar profits by shorting at the right time.

It is a strategy that, well applied, can be very lucrative.

For this reason, it is interesting to become well acquainted with all its peculiarities.

Find out more about Short Sell on eToro Official Website

How does short selling work?

Short selling may seem difficult to understand at first, but it is easily understood with an example. Let’s look at one below:

Pedro thinks that a large listed bank is in a time of financial turmoil and expects a collapse in its stock price.

In order to benefit from his prediction, Pedro decides to short-sell shares in this large listed bank.

You call your broker and tell them that you want to short sell a share in this bank.

To do this, the broker has to get a share to lend to Pedro.

You can get the stocks in a variety of places (your clients’ portfolios, your own stocks, other brokers, etc.).

Once obtained, he sells it on the market for Pedro, for a listed value at that time of 100 euros, which is deposited in Pedro’s operating account.

After a week, it is found that Pedro was right: the bank’s financial problems are made public and its share falls to 70 euros.

As the stock has fallen and Pedro had bet on this depreciation, he repurchased the stock through his broker.

The broker uses the 100 euros that he had deposited in Pedro’s account to buy a share of the bank in the market at the current price of 70 euros and returns the share to its original place (his clients’ portfolios, his own shares, other brokers, etc.).

Pedro short-sold a bank share for 100 euros and bought it back for 70 euros, thus obtaining a profit of 30 euros, from which the possible commissions of the broker would have to be subtracted.

Digital trading platforms facilitate all this work since it is not necessary to depend on a physical broker.

Simply access a platform like eToro and sell short in just a couple of clicks. And, all this, without management fees or brokerage.

Go to eToro Official Website

Difference between long and short positions

The main difference between a long position (buy long) and a short position (sell short) is in the market direction that will give us benefits.

Here’s a short outline so you know under what conditions you are likely to get and under what conditions you are likely to lose money.

• When the price of an asset rises and we go long , we will get money.
• When the price of an asset rises and we go short , we lose money.
• When you lower the price of an asset and going long , we lose money.
• When you lower the price of an asset and going short , we get money.

Invest in Forex and Stocks with eToro

Advantages and disadvantages of short selling

Thinking of trading short? Before starting to do this, it is recommended that you fully understand the advantages and disadvantages of this way of operating in the financial markets.

This way you will know whether or not this trading style suits your personality and your particular goals.

Advantages of short selling

1. The short sell gives us great versatility in trading operations.

Short selling doubles our chances of profiting from the markets.

Not only can we make a profit when a price rises, but we can also do it when it falls.

Thus, we will be able to enter and exit the markets regardless of the direction.

We will always have the possibility to trade, not only when the market goes up.

This opens up a whole new world of trading opportunities and the possibilities of making profits multiply before us.

Diversify your Portfolio with eToro

2. The short sell allows us to hedge.

This is one of the advantages most valued by investors.

Short selling can be a hedging instrument ( hedging in investment jargon).

What does this mean? It basically consists of going long and short at the same time with different types of leverage (x1, x2, etc.).

With a good hedging strategy, we could even say goodbye to the use of stop loss.

It is an advanced strategy for experienced traders.

But even in case you are not comfortable using it yet, it is reassuring to know that it is possible to hedge this way.

Hedge your positions with eToro

3. The short sell can be a fruitful strategy in the face of uncertainty scenarios.

They say that there is nothing scarier than money.

If we take a look at the black swans of recent years, such as the collapse of Lehman Brothers, we will see that crashes occurred within days that created rich opportunities to profit by shorting.

When fear is the predominant sentiment among investors, short selling could be our best ally in order to maximize our profits.

Go to eToro Official Website

4. Short selling is more likely to be able to make money faster than going long.

Stocks go up the stairs and down in the elevator (sometimes in free fall).

Prices generally advance slowly, with setbacks. But when a crash occurs, the action unfolds in a dizzying fashion.

Opening a short position at such times can give us greater benefits than a long position in a bullish scenario.

And, all this, in a much shorter time horizon.

A kind of military raid with fast, efficient, and defined entry and exit.

Open eToro’s Account for Free

Disadvantages of short selling

1. In the short sale, the losses can become unlimited.

Unlike a long position, a short position can incur unlimited losses.

When we buy an asset, the worst that can happen to us is that it drops to zero.

But when we go short, we won’t have that zero limit on our position.

In addition, volatility can sometimes make a price rebound with great force, generating losses that can be greater than 100%.

Luckily, brokers like eToro avoid this problem with the stop-loss and maintenance margin requirements that must be taken into account in order to open the short sell operation.

Go to eToro Official Website

2. In the short sale, the long-term statistical probability is negative.

Markets generally tend to run on optimism.

Setbacks and bear markets are usually caused by the liquidation of assets by investors who accessed low prices in a previous period.

Therefore, using a short sell strategy outside of specific black swan moments and on specific assets has a negative statistical probability for the trader.

Open eToro’s Account for Free

3. The short sell of shares with dividends requires us to pay a portion to the broker.

This is one of the biggest drawbacks of short selling, although it only applies to shares that give dividends to their shareholders.

If we are with an open short position with a share that gives the right to a dividend, we must pay the sum to our broker.

We must take this expense into account when calculating the profitability of our short operations.

Visit eToro Official Website

4. Regulators can temporarily suspend short selling in certain scenarios.

At times of great downward pressure on economies, the authorities may temporarily suspend short selling to avoid a widespread financial collapse.

And this usually happens at times when it would be most profitable to keep short positions open.

This is a phenomenon that never occurs in long positions.

In this case, the opposite happens: governments boast of the good performance of the markets and the cycle of bullish euphoria continues to feedback.

This is, therefore, one of the main disadvantages of short trading: the success of this trade may be temporary and unexpected losses may occur.

Start Copy Trading with eToro

Why should you short sell in the Stock market?

At this point, you already know the ins and outs of speculation in the stock market with short selling (what it consists of, what are its pros and cons, etc.).

But, in the end, it can all be summed up to a great irresistible attraction: the enormous operational versatility it offers us.

That is ultimately the main reason to consider including short selling in your trading strategy.

This versatility is especially noticeable, for example, when investing in the short term.

Opportunities often arise to make a quick entry and exit from the market to potentially make a profit, with an acceptable level of risk.

The short sell allows us to do it.

We can thus, for example, remain long during the bull market of an asset, but take advantage of the setbacks or pullbacks to open a short position that, worth the redundancy, will also be of short duration.

This minimizes exposure and maximizes the probability of potential benefits.

And this is just one example of how to include short selling in your trading strategy.

The horizons that open up are practically limitless, and once you’ve become familiar with short selling, you will realize all the opportunities that you may not have been taking until now.

Start Stock Trading with eToro

How to open a short position on eToro?

After the theory, it is time for practice. How to sell a stock short? Now we are going to explain how to do it on eToro.

It is very simple. The first thing you will need to do is access the operating platform with your access credentials.

Next, you will need to choose the instrument of your choice (Forex, stocks, commodities, cryptocurrencies, etc.).

From the chosen instrument itself, you can open a short sell by clicking SELL.

Enter the parameters you want, such as stop-loss, leverage level, number of purchase units, and take profit.

Click on RUN TRADE and your short sell trade is ready.

Remember, the greater the fall in the price of the asset in which you operate, the greater the benefits you will obtain. And vice versa.

In short, short selling is a strategy that we must know and include in our arsenal since it allows us to take advantage of all kinds of scenarios.

Sometimes long positions don’t make much sense, such as after a bubble burst or after the end of a long bull cycle.

In that case, short positions can allow us to make profits that would otherwise be impossible to achieve.

In addition to being profitable, short sales can serve as a kind of insurance if we use an appropriate hedging strategy.

Short selling opens up endless possibilities that have the potential to fully energize our trading strategy.

Go to eToro Official Website