Shorting - How do you do it?

[stargazer]

Hi all

Given the state of the market i thought it may be beneficial if someone that is more experienced could explain how to SHORT.

I am aware that you short when you beleive the price is going to go down.

Do you short an index or a stock

How is the transaction set up

How do you make your money in the set up.

Many new people do not know how to short and buy in long in a down trend hopiing the price will come up.

Cheers
SG

 

[tech/a]

Re: Shorting

Just started shorting a few weeks ago after 14 yrs of trading long.
Opened a CFD account with Pacific Trader

http://www.pacconsec.com.au/

Hows shorting work?

Basically you sell a stock which you don't own then buy it back at a lower price --- returning the stock and pocketing the difference.

There are 263 stocks available for shorting through Pacific trader.If I opened an account with Marketech as well that would add another 63 stocks Pacific Trader don't carry as short able to the list.

http://www.marketech.com.au/

 

[Timmy]

There is a reasonable explanation on the ASX website of short selling at this link.

In a nutshell you sell shares that you don't own, and buy them back later: if you buy them back at a lower price than you initially sold them at you have made a profit. If you buy them back at higher price than you initially sold them at you have made a loss. For practical purposes most people will use CFDs (DMA, of course) to short sell - any decent CFD provider will provide a good description of the process on their website.

 

[Timmy]

tech/a beat me to it ... see the links he has posted for info on CFD shorts.

 

[numbercruncher]

You may be interested in Put Options. They are for pussycats like myself

Long puts allows investors to participate in downward price moves in underlying stocks and indices just as long calls do for upward price moves. Importantly both long puts and calls provide exposure for a limited known outlay.

Purchasing puts without owning shares of the underlying stock is a purely directional strategy
used for bearish speculation. The primary motivation of this investor is to realise financial reward from a decrease in price of the underlying security.

Experience and precision are key in selecting the right option (expiration and strike price)
for the most profitable result. In general, the more out-of-the-money the put purchased is the
more bearish the strategy, as bigger decreases in the underlying stock price are required for
the option to reach the break-even point.

A long put offers a leveraged alternative to a bearish, or "short sale" of the underlying stock,
and offers less potential risk to the investor. Purchasing a put generally requires lower up-front capital commitment than the margin required to establish a short stock position. Regardless of market conditions, a long put will never require a margin call. As the contract becomes more profitable, increasing leverage can result in large percentage profits

http://www.asx.com.au/investor/options/how/long_put.htm

 

[Judd]

First you get a battery.........Oh bugger, wrong short.

 

[wayneL]

Just a point. There is a bit of a difference between CFDs and shares.

To short sell shares they need to be borrowed first, as per above posts. CFDs are different; they are a derivative and you just short them. Borrowing does not come into it.</pedantic>

 

[Timmy]

There is a bit of a difference between CFDs and shares.

Yes, there are quite a few differences between CFDs and shares - I don't think any of the info provided in this thread so far is enough to help one make a categorical decision to trade one or the other - just introductory info really and a few helpful links.

 

[stargazer]

Great thanks all, clears it up.

Cheers
SG

 

[happyjack]

Just a point. There is a bit of a difference between CFDs and shares.

To short sell shares they need to be borrowed first, as per above posts. CFDs are different; they are a derivative and you just short them. Borrowing does not come into it.</pedantic>

Contracts for difference are LEVERAGED so borrowing DOES come in to it, its just that you are borrowing money not shares. </VERY pedantic> happyjack
What I forgot is there are two tpes of CFD's OTC (over the counter) and exchange cfd. Exchange are tied to the share price and go up and down with the share price OTC are the price that the market maker puts on them, which will be close but not neccessarily identical.

 

[cuttlefish]

For those that use CFD's - I've got a few questions:

How is the market made for CFD's?
Who are the MM's and how do they operate? '
What slippage is there between the CFD market and the real underlying market?
How does the slippage vary with volume?
How does volume compare to the underlying market volumes?

 

[Aviator33]

For those that use CFD's - I've got a few questions:

How is the market made for CFD's?
Who are the MM's and how do they operate? '
What slippage is there between the CFD market and the real underlying market?
How does the slippage vary with volume?
How does volume compare to the underlying market volumes?

I'll let someone familiar with MM CFDs answer those questions in relation to MMs. As for DMAs it's pretty straight forward:

What slippage is there between the CFD market and the real underlying market?

None. You deal directly in the underlying market

How does the slippage vary with volume?

It doesn't - see above

How does volume compare to the underlying market volumes?

Exactly the same, you're dealing in the actual market.

In fact, can someone please tell me why MMs even exist? Not joking, I really want to understand why someone would deal with a MM instead of a DMA?

Cheers
AV

 

[cuttlefish]

Aviator - So are you saying that with DMA if you sell via a CFD provider your order appears in the market in direct proportion to the CFD order volume and gets filled or not depending on what the underlying market does? How does the CFD provider manage this situation for shorts? And what timeframe can you short over?

 

[Aviator33]

Aviator - So are you saying that with DMA if you sell via a CFD provider your order appears in the market in direct proportion to the CFD order volume and gets filled or not depending on what the underlying market does?

Yup, that's exactly right Cuttlefish. If you use a DMA CFD provider you deal directly in the underlying market (hence the term Direct Market Access. Once I push the buy/sell order with my CFD provider I can see the order appear in the market in under 1/2 second. And that's not in the ASX CFD market (which at the moment is a bit of a joke IMHO) but in the actual underlying equity (share).

How does the CFD provider manage this situation for shorts?

To be honest, I've really got no idea how they acually do it but I expect it's the same as a standard short on the equity itself (ie "borrow" the stock from another customer). Perhaps someone more knowledgeable on the inner workings can answer that?

And what timeframe can you short over?

Anything you like, from seconds to years. However, if you hold a position overnight there will be interest charges. Good thing about shorts is that you actually receive the interest, not pay it. However, if a stock goes ex-dividend when you hold it short you will have to pay the dividend amount. Always a "gotcha"

Cheers
AV

 

[peter2]

MM's exist because they got into the market first and have established themselves.
MM's exist because they are so many people that don't know the difference between MM and DMA.
MM's exist because there are plenty more people to replace those that lose their money.

MM's can provide fills when the market cannot. MM's can tell by your trading record if you are a profitable trader with good discipline. If you are a loser you will continue to get better fills with an occasional "unlucky" fill. When your trading improves and you become a much better trader you will notice that these better fills are not available and the spreads will jump around more than you had ever noticed before.

When you realise that your results are not what you expect and pause to review. Don't worry about the MM's. There are plenty of other people willing to trade with them.

 

[cuttlefish]

thanks Aviator - I didn't realise this - so even when you put a short sell on via DMA CFD provider it also appears directly in market in the sell queue? Doesn't sound too bad if thats the case.

 

[Aviator33]

thanks Aviator - I didn't realise this - so even when you put a short sell on via DMA CFD provider it also appears directly in market in the sell queue? Doesn't sound too bad if thats the case.

No probs Cuttlefish, glad to help. And yes, the sell order appears in the queue along with everyone else just as if you already owned the stock and were trying to sell it.

MM's can provide fills when the market cannot. MM's can tell by your trading record if you are a profitable trader with good discipline. If you are a loser you will continue to get better fills with an occasional "unlucky" fill. When your trading improves and you become a much better trader you will notice that these better fills are not available and the spreads will jump around more than you had ever noticed before.

My point exactly Pete. It's hard enough trying to beat the market sometimes, let alone having to beat your broker at the same time! How can you expect to "beat" another trader when they know EXACTLY where your stops are!!?? The horror stories I hear on here and many other forums about bad fills, no fills, stop chasing etc etc etc....??????


Cheers
AV

 

[Kauri]

In the bad old days when CFD's when new there were a lot of horror stories.. in fact there still seem to be .. the mob I deal with have electronic ordering and my orders are activated and filled quicker than I navigate through the system with my trusty mouse.. invariably within cooee of the price I have ordered on.. sometimes slightly better, sometimes slightly worse. You can see the MM spread.. and it is your choice to accept it or not... methinks a lot of "operaror error"?? is conveniently placed on the MM... strangely no-one seems able to post the trade placed and trade closed emails that are sent on every trade to show the rest of the punters the tricks the MM gets up to. Like all trading, if you don't fully understand the mechanics of what you are doing there are going to be problems... of your own making usually..
.... just think of the blame the MM provider is going to cop when you had a stop for instance just under BHP(an ADR share) on 5Feb.. only to see it gap down on open on 6Feb by about $2.25.... plurry dishonest scheming MM.. apart from jumping your stop he also manipulated the BHP share price deliberately to do it..
Do DMA have GSL???
Is the premium for GSL worth it??
What does "slippage factor" mean on the MM platform??
How much are you willing to pay to find out??
Cheers
..........Kauri

 

[Trembling Hand]

strangely no-one seems able to post the trade placed and trade closed emails that are sent on every trade to show the rest of the punters the tricks the MM gets up to.
..........Kauri

Yes I to would like to see a chart or something with the price manipulation so we can look at it against the market action.

 

[peter2]

Yes, a DMA broker must borrow the shares from someone to hedge its position. The real owner of the shares can ask for them back at any time and if the broker cannot find another source, then the cfd trader's position is closed. It doesn't matter if this is inconvenient for the cfd trader and may result in a loss. This is one reason to deal with a broker with access to the most shares.

I agree. Most accusations of broker malpractice occur as a result of the trader's ignorance of the broker's terms and conditions. Losing traders don't accept responsibility for their losses. It is never their fault.