Introduction:

Share markets go up as well as down. You can profit from rising share prices by investing in shares. You can also profit from falling share prices by ‘short selling’. This smart investing article considers the mechanics of both long and short positions in the sharemarket.

Going ‘Long’:

When most people think of investing in the sharemarket, they probably imagine buying a parcel of shares, holding them, collecting dividends, and at some later time, perhaps selling them. In investing jargon, that means to go ‘long’.

Example:

If you buy 1,000 NED Ltd shares at $1, you are ‘long’ NED at $1.

• If the price rises to $2, you can sell and make a $1,000 profit (i.e., $2,000 – $1,000 = $1,000).
• If the price falls to $0.50, you can sell and make a $500 loss (i.e., $1,000 – $500 = $500).

 

Going ‘Short’:

The opposite of going ‘long’ is to go ‘short’, which means to sell shares that you do not own. Short-selling involves selling a share that you don’t own, with the expectation that its price will decline and you can buy it back at a lower level. Your profit will be the difference between the price at which you sold the share and the lower price you bought it back at. This investing practice is carried out regularly.

Example:

You sell 1,000 NED Ltd shares at $1.00 – you are short NED at $1.00.

• If the share price of NED falls to $0.80, you need to buy 1,000 NED Ltd shares at $0.80 to close out the short position. The profit (sale less cost) is $1,000 – $800 = $200.
• If the share price of NED increases to $1.40, you need to buy 1,000 NED Ltd shares at $1.40 to close out the short position. The loss (sale less cost) is $1,000 – $1,400 = ($400).

 

Risks – Short versus Long:

Long Positions:

• Potential profit is unlimited.
• Potential loss is limited to the amount invested.

 

Short Positions:

• Potential profit is limited.
• Potential loss is unlimited because there is no limit on how high the share price can go.

 

Short Selling on the Australian Sharemarket:

Short selling on the Australian market is only allowed in accordance with the Australian Stock Exchange (ASX) rules and guidelines. There is a limited list of approved companies that can be sold short. Stockbrokers are required to report their net short positions to the ASX each day. Individual investors are not required to do this, but they must inform their stockbroker before placing an order.

ASIC (The Australian Securities and Investment Commission) has placed strict controls on short selling to bring order to the sharemarket during periods of market turmoil. Short selling is a higher-risk strategy, and it is essential to understand and consider the risks based on your personal circumstances.

Conclusion:

Short selling has elements that make it riskier than simply going ‘long’. Understanding both long and short positions and their associated risks is crucial for making informed investment decisions.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.