What is a short position?
This is an investment technique used when an investor believes the value of a stock is about to drop. First, the investor borrows stock from a broker and sells it on the market. Later on, they buy the stock back and return it to the broker, if the price of the stock has dropped, the investor makes a profit.
Where have you heard about short positions?
The 2015 movie The Big Short made this investment strategy more mainstream. The Oscar-winning film featured a handful of traders who saw the 2007-8 financial crisis coming and took a short position against home loan-backed securities. When the crisis did finally happen, these traders made a lot of money.
What you need to know about the short position...
Investors can borrow stock from brokers by paying interest as a fee. Or they can go short using contracts for difference (CFDs), which involves no borrowing and is a pure trade on the price difference.
Stock short positions come with unlimited risk and limited reward. For example, if an investor sells borrowed stock at £10 a share, the maximum they could make is £10 minus any fees – that’s if the stock hits £0. If the stock goes above £10, the investor will make a loss when they buy back the stock and return it to the broker.
The opposite of a short position is a long position, where an investor buys or sells stock in the hope that it will rise in value.
An investor who takes a short stock position has a bearish view of the market, while someone who takes a long position is said to be bullish.