Short Selling

Short Selling In a nutshell – Yes it is Legal!

Despite some adverse media coverage during the first few months of 2008, short selling is a legal way of profiting from a falling market. Short selling is least topical when the market is riding high which is what the Australian share market investors experienced to the end of 2007!.

So what is short selling? Basically, in the same way we can buy shares and see the benefit when they rise in price, we can also do the opposite by short selling, that is selling now to buy back cheaper in the future.

When should it be used? When you have a view that the market in those securities are likely to fall, i.e. either a bear market or bear trend.

Can all shares be short sold? No, they have to be on an Approved List of securities of the ASX and you should consult your stockbrokers as to this prior to placing an order to short sell. however, CFDs can be short sold without these restrictions. Consult your CFD provider for details and remember to read the financial services guide.

What are the restrictions? It is limited to a maximum of 10% of listed securities of a particular company.

How is this done? Through certain full service brokers, they will; borrow the stock on your behalf through a custodian.

What is the cost? Typically this is negotiated between yourself and the broker, but be mindful that you will be
1.Liable for any dividends and franking credits to the buyer over the period
2.Interest costs that may be charged by the broker for the duration
3.Initial and Subsequent Margin requirements to your broker.
Example:
You choose to short sell 1,000 Westfield Group (WDC) shares @ $17.50 giving a total value of $17,500.00.
You will be required to provide an initial margin cover of 20% of this with your broker, i.e. 20% x $17,500.00.
If the shares rise while you are short sold, you are required to provide additional margin cover of 100%. That is, if the price increases by $1.00, you must provide your broker with additional margin cover of $1,000 (100% of $1.00 price rise x 1,000 shares).
Similarly, favourable movements can be credited back to your account.