Short

DEFINITION of Short

Short describes a trade that makes a profit if the asset being traded falls in price. It is also referred to as going short, shorting or sometimes selling.

WHAT IT IS IN ESSENCE

When it comes to stock market trading, the terms long and short refer to whether a trade was initiated by buying first or selling first.

A long trade is initiated by purchasing with the expectation to sell at a higher price in the future and realize a profit.

The opposite kind of trade is initiated by selling, before buying, with the intent to repurchase the stock at a lower price and realize a profit. 

Shorting is the opposite of going long, or trading to make a profit if the market increases in price.

The most popular method of shorting is this kind of selling. There are two main methods:

  • When a trader borrows an asset they do not own from a broker and sells it on the market. Usually, the borrowing and selling of the asset are taken care of by the broker.
  • Derivatives such as CFDs or spread bets enable traders to open this positions that do not require borrowing the underlying asset.

There are other ways of opening these positions. Digital 100s, which can only be traded by professional clients, offer a simplified form of option that does not require the trader to own the underlying asset.

HOW TO USE

Day traders sell assets before buying them and are hoping the price will go down. They realize a profit if the price they buy it for is lower than the price they sold it at.

“Shorting” is confusing to most new traders since in the real world we typically have to buy something to sell it. In the financial markets, you can buy and then sell or sell then buy.

Day traders often use the terms “sell” and “short” interchangeably.

Similarly, some trading software has a trade entry button marked “sell,” while others have a trade entry button marked “short.”

This term often is used to describe an open position. As in “I am short SPY.” This indicates the trader currently has a short position in S&P 500 (SPY) ETF.

Traders often say I am “going short” to indicate their interest in shorting a particular asset.