Short Sell case study
- Profit from a falling security price
- Continue to trade and potentially profit from a bear market
- An alternative hedging strategy to options or warrants
- Pursue a long/short or pairs trading strategy so you can potentially profit on both sides of the trade
- Potentially earn interest on your short selling collateral, helping offset other interest costs associated with your margin loan
How does it work?
Short selling is a strategy that investors can implement to profit from a decline in the value of a security.
The idea may seem strange at first; the strategy is to sell a security, then to buy it back at a lower price. It is important to understand that the security being sold is not actually owned by the investor but borrowed from someone else.
This means you sell first, putting you into a negative unit holding and then buy it back at a later stage to close the position, putting you back to a 0 unit holding. To do this investors need to borrow the security - the Short Plus feature on a margin loan from Leveraged can assist.
Short selling can be used as a hedging tool for an existing holding. This allows users to protect their existing holding, without having to sell their current holding which may trigger a CGT event.
The Lending Ratio assigned by the Lender to Security A is 75%, giving a Lending Value of $45,000 ($60,000 x 75%). Assume you have geared approximately 66% borrowing $30,000 under your Margin Loan Facility. The difference between the current Lending Value and the amount you have borrowed is your borrowing capacity. In this example your borrowing capacity is $15,000 (being $45,000 Lending Value minus $30,000 Facility Balance).
You expect the price of Security B to fall over the short term. Security B has a current market price of $10.00 and you would like to short sell 6,000 units. You give the Lender a Security Borrow Request. If the Lender accepts your request then your Margin Loan Facility is updated to reflect the borrowing of Security B.
|Security A||Security B||Total|
|Current market price||$20||$10|
|Lending Value||$45,000||- $9,000||$36,000|
In this example, the Lender applies a Safety Margin of 15% to Security B, and your borrowing capacity is reduced to $6,000 (being $36,000 Lending Value minus $30,000 Facility Balance).
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Examples are for illustration only and are not intended as recommendations and may not reflect actual outcomes. Past performance is not an indication of future performance. The information provided in this document has not been verified and may be subject to change. It is given in good faith and has been derived from sources believed to be accurate. Accordingly no representation or warranty, express or implied is made as to the fairness, accuracy, completeness or correction of the information and opinions contained in this article. To the maximum extent permitted by law, no entity in the Group, its agents or officers shall be liable for any loss or damage arising from the reliance upon, or use of the information contained in this article.
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