Short-selling

With a Trader Workstation account (TWS) you can not only profit from rising share prices, but also realize profits when prices fall. The TWS account specializes in short-selling securities and enables you to carry out short-selling easily and conveniently with our trading platforms. You get a clear presentation of all information, such as whether a stock can be sold short (shortable) or how high the lending fee is. It only takes a few clicks to execute the short sale.

The depot is ideally suited for short sellers (short-sellers) to speculate on a negative market development or to hedge their long depot. Short selling in the TWS account is covered and possible on the stock exchanges in Germany, the USA or the UK.

Check today if you meet the requirements for a margin account and open your live account.


Anatomy of a short sale

Short-selling is a strategy that aims to profit from a decline in the price of a security. However, short-selling can also be used to hedge the downside risk of a long position.

Short-sellers borrow a security (covered short-selling) and then sell it on the open market with the intention of buying it back later at a lower price for a profit.

We would like to use an example to explain the process in more detail. This example is not to be understood as investment advice or a trading recommendation.
 

The process of a short sale

  1. A short-seller identifies a security that he believes will fall in price and which he therefore wants to sell short. He opens an TWS margin account through which he can borrow securities that he would like to return in the future. In return for these borrowed shares, the short-seller must deposit collateral or assets to hedge against a sharp rise in the price of the borrowed security and usually makes interest payments on the value of the borrowed security.
  2. The short-seller borrows 10 shares from another investor or FXFlat/Interactive Brokers. The lender of the shares can reclaim them with limited notice.
  3. The short-seller then sells these 10 shares for $1,000 ($100 per share).The total price of the 10 shares falls to $800 ($80 per share).
  4. The short-seller buys 10 shares for $800 ($80 per share).
  5. The short-seller then returns the 10 borrowed shares to FXFlat/Interactive Brokers and makes a total profit of $200.

Anatomy of a short squeeze

A short squeeze occurs when the price of a security that has been sold heavily short rises significantly, forcing the short-seller to buy back the security or hedge his position to limit losses. Increased short covering can lead to a further increase in the price of the security as investors are forced to buy the security.

A short squeeze can be triggered by a sharp rise in the price of the security or reduced liquidity in the lending market for the security, causing the broker to recall the borrowed shares.

We would like to use an example to explain the process in more detail. This example is not to be understood as investment advice or a trading recommendation.
 

The process of a short squeeze

  1. A short-seller borrows 10 shares from another investor or FXFlat/Interactive Brokers.
  2. The short seller then sells these 10 shares for $1,000 ($100 per share).
  3. The total price for the 10 shares increases sharply and doubles to $2,000 ($200 per share).
  4. To avoid further losses or due to FXFlat/Interactive Brokers requirements, for example a demand for additional collateral, which the short-seller cannot or will not meet, the short seller buys 10 shares for $2,000 ($200 per share).
  5. The short-seller returns the 10 borrowed shares to FXFlat/Interactive Brokers and suffers a total loss of $1,000.

Advantages and disadvantages of a short sale

In the following we have compiled the advantages and disadvantages of a short sale. Short-selling also involves opportunities and risks that every short-seller should be aware of.

Advantages

  1. A great advantage of a short-seller is certainly the flexibility to participate in both directions of the price trend, i.e. to also profit from falling prices on the markets.
  2. Many traders who make their shares available for lending or short selling at FXFlat/Interactive Brokers use the opportunity to build up an additional income stream, as interest accrues for lending.
  3. Short-selling can also be used to hedge the downside risk of a long position.

Disadvantages

  1. As a short-seller, you should always be aware of the high risk of short-selling. Due to the fact that share prices can theoretically rise indefinitely, the losses in short-selling are also theoretically not limited. Of course, at a certain point the margin system kicks in if the deposited collateral is no longer sufficient. With leveraged products, the risk of loss is correspondingly higher due to the leverage.
  2. Short-selling incurs costs, the amount of which can vary greatly depending on the security. For the borrowed shares, the short-seller usually makes interest payments on the value of the borrowed security. The lending fee is set by Interactive Brokers and can be viewed at any time in the trading platforms.
  3. Should a dividend accrue on the shares during the period of the short sale, the short-seller is obliged to make a compensation payment to the lender of the share.

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