Shorting a stock is not usually the first skill a beginner investor learns. In the UK, most people start by buying shares and hoping their value will rise over time. Short trading takes the opposite view, aiming to profit when prices fall. It can appeal during turbulent markets, when some see an opportunity to act on falling valuations.
Should you perceive a company as overpriced or in danger, it may be worthwhile to investigate shorting. In the UK, it requires specific trading methods, a clear grasp of the risks, and awareness of the rules that govern it. Understanding how it works can help you decide whether it has a place in your investment approach.
In This Guide
What is Short Trading?
Short trading, or short selling, is a strategy used to profit from a drop in a company’s share price. Instead of purchasing shares in the hope they will increase in value, you borrow them, sell them immediately, and plan to repurchase them later at a lower cost before returning them to the lender. Your profit is the difference between the selling price and the repurchase price, after expenses.
In the UK, most retail traders use contracts for difference (CFDs) or spread betting to take short positions. This is primarily because borrowing shares directly is more complicated and less common.
For instance, if you short 100 shares priced at £5 each, you sell them for £500. If the price then drops to £2, buying them back costs £200, leaving a £300 profit before fees. However, if the price rises, losses can mount quickly because there is no limit to how high a share price can go.
Going Long vs Going Short
Most UK investors are more familiar with going long, which means buying shares with the expectation that their value will rise over time. This approach fits well with long-term investing strategies, including those used in Stocks and Shares ISAs, and may also provide dividend income. Going short takes the opposite stance. It is a speculative move that involves selling borrowed shares in anticipation of a price drop. You will then buy them back later at a lower cost.
In simple terms:
- Going long: You have confidence in a company’s future growth, you own the shares, and you may receive dividends.
- Going short: You anticipate a decline in value, you sell shares you do not own, and you aim to repurchase them for less.
Shorting is usually linked to active, short-term trading rather than long-term portfolio building. It requires constant monitoring, quick decision-making, and a clear plan for managing risk. While long positions benefit from the natural upward bias of markets over time, short positions can deliver results more quickly if the market moves in their favour. However, they can also turn against you just as fast, making discipline and risk controls essential.
Risks When Shorting Stocks
Shorting can offer opportunities, but the risks are significantly different from those of traditional investing and can be far greater.
When you buy shares, the most you can lose is the money you invested. With a short position, there is no limit to how high a share price can climb, which means your potential losses have no cap. This aspect is why risk management tools like stop-loss orders are so important.
Shorting often involves using borrowed funds or leverage. If the price moves against you, your broker may require you to deposit more money to keep the position open. If you cannot meet this margin call, your trade may be closed at a loss.
Prices can move sharply in response to events like earnings announcements, takeover rumours, or regulatory changes. Even a short-lived surge can force you to close your position, locking in a loss.
In heavily shorted stocks, a sudden price jump can trigger a rush of traders trying to buy back shares. This buying pressure can push prices even higher, creating rapid and severe losses. The GameStop episode in 2021 is a well-known example.
Because of these risks, shorting is best approached with clear planning, disciplined position sizing, and a strong understanding of how leverage works. Many traders use it alongside other strategies rather than as their sole approach. As a result, they get to spread risk and avoid overexposure to a single market move.
Common Methods to Short Stocks in the UK
Retail investors in the UK rarely short shares in the traditional way, as this involves directly borrowing stock, which can be complex. Instead, they use financial instruments that replicate the effect of shorting without taking ownership of the shares.
Spread betting
Spread betting lets you speculate on a share’s price movement without owning it. You stake an amount per point of price change, choosing whether the price will rise or fall. If you predict a fall and the price drops, you make a profit based on the size of the move. Spread betting is currently free from Capital Gains Tax in the UK, but it still carries the risk of large losses because of leverage.
Contracts for Difference (CFDs)
CFDs work in a similar way to spread betting. You agree to exchange the difference between the opening and closing price of a stock. Profits are possible if the price falls, but gains are subject to Capital Gains Tax.
Both methods are widely available through FCA-regulated brokers such as IG, CMC Markets, and eToro. These platforms highlight the risks involved and require traders to complete an appropriateness assessment before opening leveraged positions.
Strategic Reasons for Shorting
Shorting is not always about making predictions against the market for its own sake. Many investors use it as a way to protect profits or reduce risk.
Hedging: If you own shares in a sector and think prices might drop soon, you could short a similar company or an index. This can help balance out losses if the market moves lower.
Event-driven trades: Some traders short a stock before important events, like earnings reports or regulatory announcements, if they expect the news to be negative.
Valuation concerns: Others short shares when they believe the price is too high compared to the company’s real value, expecting it to fall back.
Shorting can also give your portfolio another source of potential returns, even when markets are falling. However, it works best when backed by solid research and effective risk management. Acting on guesswork or headlines alone can lead to fast and costly losses.
Read our list of the best stock apps in the UK in the other guide.
Tools for Analysing Short Opportunities
Successful short traders often combine technical and fundamental analysis to identify opportunities.
Technical indicators: Tools such as moving averages, the Relative Strength Index (RSI), and the Moving Average Convergence Divergence (MACD) can highlight overbought conditions or signs that a trend is reversing.
News monitoring: Keeping track of company announcements, legal disputes, regulatory investigations, or leadership changes can reveal events that might pressure a share price.
Short interest data: Some trading platforms publish figures showing how much of a company’s stock is being shorted. High short interest can indicate strong negative sentiment but may also point to the risk of a short squeeze.
Practising on a demo account is a low-risk way to test analysis skills and learn how to react to market signals before committing real capital. Beginners should also study past market charts to see how prices responded to major news or technical signals. This can help build the ability to recognise patterns and act quickly when similar setups appear in live markets.
No. Shorting is not permitted within ISA accounts. ISAs are designed for long-term investing in assets like shares and funds. Instruments like spread bets and CFDs are not eligible.
If you hold a short position when a company pays a dividend, you are typically responsible for paying that dividend amount to the lender. It’s an extra cost to consider.
Yes, most forms of shorting involve leverage or margin. This means you borrow money or instruments to make the trade, which increases both potential profits and losses.
Absolutely. However, your decision should depend on your risk appetite and trading experience. Note that shorting is more complex than traditional investing. Beginners should practise with demo accounts and gain a solid understanding before committing real funds.
Expert Opinion
Shorting can be a useful tool, but it should never be approached casually. Experienced traders emphasise the need for thorough research, patience, and strict risk controls. It often works best as part of a balanced strategy, alongside long positions or other hedges.
Leverage can magnify gains, but it also accelerates losses. UK traders should pay close attention to FCA rules on margin and risk disclosures. Without a clear exit plan and the discipline to follow it, short trades can turn quickly against you.
In volatile markets, shorting may uncover opportunities others overlook, but preparation is what separates a calculated move from a costly mistake. Many traders begin by learning the mechanics through demo accounts and trading smaller positions to limit their exposure.
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25,000 hours of testing 60+ brokers. Our recommended broker is Capital.com.
Our recommended broker is Capital.com.
Trading whether it's short-term or day trading that's all absolutely is not for the newcomers, while it's for the person who is having a minimum of 3 years of experience and having sufficient funds so that they hedge their position against the volatility.