Short-Selling on the ASX Explained

Traders can short sell asx stocks because they believe that a company’s share price is heading down. They sell it now at a high price with the aim of buying it back at a lower price, with the difference between the two prices being the profit. It’s pretty much the opposite of how investors usually go about things – that is, buying at a low price and hoping to sell at a higher price.

So how can you sell something you don’t own?

There are basically two types of short-selling. They are referred to as covered short sales and naked short sales. A naked short sale refers to selling shares when there is no offsetting form of ownership of those shares. This is illegal.

But the Corporations Act does allow covered short sales. This is where, prior to the sell order being executed, a share lending arrangement is entered into. That arrangement is established between the person or entity planning to undertake the short sale and a third party (who does at present own the shares). The Act describes this as a “presently exercisable and unconditional right to vest the securities in the buyer”.

Basically, what it means is the short-seller pays a third party (who owns the shares) to enter into an agreement with them so they can borrow the third party’s shares for a while. Then the short sale is OK. Hence the term covered.

Firstly, retail investors are allowed to short sell. But it takes effort, a solid understanding of the process and involves way more risk than a simple buy-and-hold strategy. So, if you are interested, do not just jump in. Do lots of homework, engage a good broker and please take baby steps.

The Australian Securities & Investments Commission (ASIC) publishes, on its website, a regularly updated list of Australian companies that are “being shorted”. What’s more, it details the percentage of the company’s shares that are. It’s called the Short Position Reports Table and contains some interesting information.

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