Going Short – What is Short Selling?

Short selling with Contracts for Difference (CFDs) is a trading strategy that allows you to speculate on the decline of an asset’s price — such as stocks, commodities, or forex — without owning the underlying asset. At AvaTrade, all short selling is carried out through derivative instruments (CFDs), not physical ownership of securities. The term “Going Short”, or “shorting”, has now been adopted broadly in trading, and it refers to selling an instrument you do not own with the intention of buying it back at a lower price.

How to Short a Stock (via CFDs)

When you short sell via CFDs, you are not borrowing the actual stock. Instead, you open a CFD position that mirrors the price movement of the underlying asset. If the price drops, your position gains value, and you can close the trade for a profit. For example, instead of borrowing and selling 100 shares of a company, you open a CFD position equivalent to that exposure. If the price falls, you profit from the difference.

One of the most notable real-world examples of risks involved in short selling via CFDs is the GameStop incident in 2021, where the stock surged unexpectedly, forcing many short sellers to cover their positions at a loss. Even when using CFDs, market volatility and unexpected sentiment shifts can result in rapid price increases and significant losses.

The Power of Short Selling

Short selling CFDs helps create liquidity and contributes to efficient price discovery in the markets. It enables traders to critically assess and act on overvalued assets. Short sellers are often the first to identify negative fundamentals or overvaluation. That said, short selling — even via CFDs — can increase volatility and must be approached with caution.

Speculative Short Selling and Hedging

Short selling through CFDs can be speculative or used as a hedge. In a speculative approach, traders aim to profit from expected declines. In hedging, short CFD positions can offset potential losses in existing long positions. For example, if you hold long exposure to a stock and fear a downturn, you might open a short CFD on that same stock to reduce your overall risk.

Advantages of Short Selling

Short selling CFDs offers several key advantages:

  • It enables traders to benefit from falling markets without owning the underlying asset.
  • CFD trading is executed electronically, eliminating the complexities of handling physical assets.
  • Short positions can be managed with tools like stop loss, take profit, and other order types.
  • CFDs allow the use of leverage, so traders can open positions larger than their capital.

Disadvantages of Short Selling

Some risks and drawbacks of short selling via CFDs include:

  • CFDs are leveraged products, which means losses can exceed your initial margin if the market moves against you.
  • Short squeezes — sudden upward spikes in price — can cause rapid losses on short CFD positions.
  • Markets generally trend upward over time, making long-term short positions riskier.
  • In volatile markets, stop losses may be triggered by temporary price spikes.
  • CFD trading involves overnight fees and other costs that can erode profitability over time.

Example of CFD Short Selling

Suppose crude oil is trading at $80 per barrel. A trader who believes the price will fall opens a short CFD position. If oil drops to $78, the trader closes the position and gains $2 per unit. If the price rises instead, the trader incurs a loss.

Short Selling in Spread Betting

Spread betting also allows short selling on financial instruments without owning the underlying asset. When you expect a market to fall, you place a “sell” bet per point of price decline. Like CFDs, this is a derivative product, and profits/losses are based on price movement, not asset ownership.

Emerging Trends in Short Selling

Short selling activity — including via CFDs — often increases during times of uncertainty. Regulators like ESMA in Europe and the SEC in the US have historically implemented temporary restrictions to reduce volatility during crises. These actions highlight both the importance and risks of short selling derivatives.

The Role of Short Selling During Market Crises

Short selling via CFDs has provided traders with a tool to manage risk and uncover overvalued assets. Examples include traders who shorted mortgage-related instruments ahead of the 2008 financial crisis, using derivatives to hedge against systemic risk. Academic research also supports that short interest often precedes price corrections.

Real-World Illustrations

Prominent short sellers like Jim Chanos and Andrew Left have used derivatives to expose flawed or fraudulent business models. Their work highlights the potential ethical and analytical role short sellers play — even when trading via CFDs — in maintaining market discipline.

Short Selling Regulation

CFD short selling is regulated across major jurisdictions to protect market stability. Regulators focus on ensuring transparency and preventing abuses such as excessive leverage or market manipulation. Traders must follow guidelines on margin, disclosure, and risk management when engaging in short selling with derivatives.

Short Selling with AvaTrade

Short selling at AvaTrade is conducted exclusively through CFDs (Contracts for Difference), which are derivative instruments. This allows traders to speculate on falling prices of various assets — such as forex, commodities, stocks, and indices — without owning the underlying instruments. By using CFDs, traders can take advantage of both rising and falling markets, using leverage and risk management tools provided by AvaTrade. With over 250 instruments available, AvaTrade offers a wide range of short selling opportunities to suit different trading strategies.

Important: AvaTrade AU is authorised to provide general advice and trading services related to derivative products only. This includes Contracts for Difference (CFDs) and does not extend to the acquisition or sale of physical financial products such as shares, bonds or ETFs.

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Short Selling main FAQs

  • How can you manage the risk on a short sale?

    Because the potential loss on a short sale is unlimited it is critically important that traders work to proactively manage that risk. There are several ways to do this, including the use of a buy stop order to protect against the price of the underlying going up too much. An alternative is to place a trailing buy stop order that will follow the price of the underlying by the amount you specify and only trigger if the price goes against you. This allows you to let your winning short trades run.

     
  • Why would I want to sell short?

    Most people look to buy assets when the price is rising, but shy away from profiting from a falling price by short selling. However, there is nothing inherently wrong with making a profit from a falling price when you are bearish and believe the price will continue falling. This is especially true for short selling with CFDs where you aren’t actually selling the underlying asset, but are instead speculating on the changing price only.

     
  • What is naked short selling?

    A naked short sale is the illegal practice of short selling shares that do not exist. Typically, in short selling the trader must first borrow shares in order to sell them short. But with naked short selling there are no shares borrowed and so the short sale puts more short pressure on the stock that could be larger than the available tradeable shares. Naked short selling was made illegal in the wake of the 2008 financial crisis, but it still occurs at times due to loopholes in regulations and differences between electronic and paper trading systems.