Most people are familiar with the idea of buying low and selling high, but did you know it’s also possible to make money when a stock price falls? This is called short selling, or simply "shorting" a stock — and while it sounds complex, it’s a common tactic used by traders and investors alike.
In this beginner’s guide, we’ll break down how shorting works, the different ways you can short stocks in the UK, and the potential risks and rewards involved. Whether you're curious about how investors profit in bear markets or want to explore new trading strategies, this article will give you a solid grounding in short selling.
What Does It Mean to Short a Stock?
Shorting a stock means you're betting that its price will fall. Instead of buying shares and hoping they go up in value, you essentially do the opposite — sell shares first and buy them back later at a lower price to make a profit.
This strategy is often used by traders during:
Market downturns
Company-specific bad news
Periods of overvaluation
In practice, shorting involves borrowing shares (typically via a broker), selling them on the market, and then buying them back later — ideally at a lower price — to return to the lender.
You profit from the price difference between the selling and repurchase price.
How to Short Stocks in the UK
There are two main ways to short stocks in the UK without actually borrowing shares manually:
1. CFDs (Contracts for Difference)
With a CFD, you don’t own or borrow the underlying asset. Instead, you enter into a contract with a broker to speculate on the price movement. If the price drops, you profit; if it rises, you lose.
Example:
You open a short CFD on a company at £5 per share. If it falls to £4, you make £1 per share in profit (minus fees). If it rises to £6, you lose £1 per share.
CFDs allow you to:
Short thousands of global stocks
Use leverage to control larger positions with less capital
Set stop-loss and take-profit orders for risk management
2. Spread Betting
Spread betting allows you to speculate on whether a market will rise or fall by betting a fixed amount per point of price movement. It's tax-free in the UK (for most people), and you can go short just as easily as going long.
Example:
You bet £5 per point that a stock will fall. If it drops 20 points, you gain £100 (5 x 20). If it rises 20 points, you lose £100.
Benefits include:
Tax-free profits (no Capital Gains Tax or Stamp Duty)
24/5 market access
Available on many trading platforms regulated by the FCA
Why Do Traders Short Stocks?
There are several reasons traders may choose to short a stock:
Profit in falling markets
Shorting can help you earn when markets or specific stocks decline.
Hedge existing positions
If you own long-term investments, shorting related assets can act as insurance during downturns.
Exploit overvaluation
Traders often short stocks they believe are overhyped or trading at unrealistic valuations.
React to bad news
Company-specific issues (profit warnings, scandals, debt concerns) often trigger short-term price drops.
Risks of Shorting Stocks
Short selling is not without risk, and it’s vital to understand the downsides before getting started.
1. Unlimited Loss Potential
When you buy a stock, the most you can lose is your initial investment. But with shorting, losses can be unlimited if the stock price keeps rising. That’s why it’s essential to use stop-losses.
2. Margin Calls
CFD and spread betting positions are often leveraged, meaning small price movements can cause large losses. If the market moves against you, your broker may ask you to top up your account to maintain the position.
3. Volatility
Shorted stocks can be subject to sudden spikes (known as short squeezes) as other traders rush to buy and close positions, sending prices soaring.
4. Overnight Charges
Holding short positions overnight usually incurs financing fees, which can eat into profits over time.
Real-World Example: How Shorting Works
Let’s say you believe Company X is overvalued and due a fall.
You short sell 100 shares via a CFD at £10 each = position size of £1,000
A week later, the price drops to £8 per share
You close your position, buying back at £800
You’ve made a £200 profit (minus spread and fees)
If instead, the price rose to £12, you’d lose £200 — and potentially more if you didn’t set a stop-loss.
FAQs: Short Selling for Beginners
Is short selling legal in the UK?
Yes, short selling is legal and regulated in the UK. However, during periods of market turmoil, the FCA may temporarily restrict shorting in certain sectors.
Is shorting suitable for beginners?
It can be — but only if you understand the risks and use strict risk management. A demo account is a good place to start before trading real money.
Do I need a special account to short stocks?
Most FCA-regulated trading platforms offer CFD and spread betting accounts, which allow shorting. Make sure your chosen broker supports short positions and is properly regulated.
Is short selling the same as betting against a company?
In essence, yes — you’re speculating that the company’s share price will fall. However, short selling is often used as a short-term strategy based on technical analysis, rather than a belief that a company will fail.
Comparing Shorting vs Going Long
Understanding the difference between short selling and going long is essential for any trader. Here’s a breakdown of how the two strategies compare:
1. Profit Direction
Shorting allows you to profit when a stock’s price falls.
Going long involves buying an asset to profit when the price rises.
2. Maximum Profit Potential
In shorting, your maximum profit is limited, since a stock can only fall to zero.
When going long, the upside is unlimited, as there’s no cap on how high a stock can rise.
3. Risk Exposure
Shorting carries unlimited loss potential, since a stock could theoretically rise indefinitely.
Going long has limited risk, as you can only lose the amount you invested.
4. Market Outlook
Short sellers have a bearish outlook and expect prices to drop.
Long traders have a bullish view and anticipate rising prices.
5. Trading Tools
Shorting typically uses CFDs or spread betting, as these allow you to speculate on falling prices.
Going long can involve buying shares outright, or using CFDs, ETFs, or mutual funds.
6. Strategic Use
Shorting is often used for hedging existing positions or to profit in bear markets.
Long positions are ideal for building wealth over time, especially in bull markets.
Getting Started with Shorting Stocks
Ready to try your hand at short selling? Here’s how to begin:
Choose an FCA-regulated platform
Look for brokers offering CFDs or spread betting, with good customer support and risk tools.
Open a trading account
You’ll need to verify your identity and complete a suitability assessment.
Practise with a demo account
Learn how to open and close short trades without risking real money.
Learn technical analysis
Chart patterns and indicators like RSI and moving averages can help time your entries.
Always use stop-losses
Protect yourself from unexpected price spikes.
Manage your position size
Don’t risk more than 1–2% of your trading capital on a single trade.
Final Thoughts
Shorting stocks can be a useful strategy when markets are falling or when you spot overvalued companies. It adds flexibility to your trading toolbox and can even help balance out long-term investments during turbulent times.
However, it’s not without risk, and beginners must proceed with caution. Use demo accounts, stick to tight risk management, and never trade with money you can’t afford to lose.
With the right tools, knowledge, and discipline, short selling can be a powerful way to trade smarter — not just harder.
Subscribe for more tips! Subscribe to our newsletter
Disclaimer: Smart With Money may receive compensation from affiliate links, advertisements, and partners featured on this site. This compensation does not influence our editorial content, reviews, or recommendations. Our opinions are our own, and we aim to provide accurate and objective financial information to help you make informed decisions.
Additionally, all content provided on SmartWithMoney.co.uk is for informational purposes only and does not constitute financial advice. Please seek independent financial advice before making any financial decisions.