Short selling, or to short a stock is to attempt to take advantage of a share price falling as opposed to increasing. What. You can make money from a stock thats going down? Sounds crazy but, like many quirks in the world of finance, its completely true.

So how do you short a stock? In short (hah!), youre selling some stocks you dont own by  borrowing some from a shareholder in the company. Once these borrowed shares are sold, you have to wait until the price (hopefully) declines, and then you can re-purchase the borrowed shares at a cheaper price. In this case you will profit because you sold the shares at a high price, and then after repurchasing them at a lower price and returning them to the original owner, you pocket the difference. Short sellers incur an interest charge payable to the owner of the original shares they borrowed thats the incentive for the actual holders of the shares to allow them to be borrowed by people wishing to short sell them. Confused yet?

The theory behind short selling is fairly simple (not if you read my explanation!), however in practice to actually do it on the ASX is a much harder task. In my experience it is not worth the effort because the brokers I have used have a lot of restrictions and rules which make it an unattractive option. A better option if you are keen to be involved with short selling would be to get access to a broker that trades CFDs (contracts for difference) as this is a much easier instrument to short sell. I will post more about CFDs in the future, but if you are a beginner investor this three letter acronym is your absolute worst nightmare. Avoid it at all costs! They are a highly leveraged investment, meaning you only need to put up a small amount of money for the position you are trading, but could then stand to lose almost infinite sums of money if the market turns against you. Do the right thing and run for the hills if you see it!

Ill admit this cartoon is in poor taste but if you shorted BBG a few weeks ago youd be a rich person today!

The ASX publishes an interesting document on their website known as the Daily Short Sell Report . This report shows a list of ASX 200 stocks and the percentage of their shares that are currently being short sold. I also like this report because it shows the issued capital for the ASX 200 companies quite useful if you want to find these figures quickly.

Short selling can have some interesting implications for trading say for example a lot of traders expect a company will release a negative announcement. They may seek to cash in on that view by short selling the company prior to the announcement. Should the announcement actually be positive or not as bad as feared theyll then generally hurry to close their position and you may observe the price going up! The reverse is also true: if a company releases positive news but holders were expecting better results the price might fall. Have I made you lose interest in trading yet?