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Best Brokers for Short Selling in Australia (2022)

Will Ellis
Last Updated on August 30, 2022
Short Selling

Most investment trading is positive, in that profits are made possible if the market moves up. Short selling, however, stands out as a trading strategy that speculates on a (hopefully) declining stock or other security. 

Short selling is generally considered an advanced trading strategy for use by experienced investors and traders, but there have been notable exceptions covered below. In this guide, we’re going to cover the best broker for short selling in Australia.

Table of Contents:

How We Choose our Platforms 📚


The following brokers were selected according to our research criteria. Remember that, with trading, it’s often the user and not the tool, so take time to know your strategy, adapt to your chosen service and use good financial common sense.

1. eToro (Best Overall Choice)


Key Features:

  • App-only second to Robinhood in popularity
  • Zero-commission
  • Minimum account funds: $10
  • Leverage max : 1:30
  • Harness crowd wisdom
  • Over 2000 assets: EFTs, forex, crypto, penny, CFDs
  • Indexes available: 13
etoro logo 300x120 - Best Brokers for Short Selling in Australia (2022)

eToro Service ARSN 637 489 466 Capital at risk. See PDS

Pros

  • Wide securities for diversity: includes CFDs/EFTs, short sells, forex, crypto, and commodities 
  • Fund minimum: only $10
  • Up-to-the-minute social news feed

Cons

  • Conversion fee for Australian dollars to U.S. dollars

📓 Reputation    

Let someone else short-sell for you; that’s why I’ve put this at the number 1 spot. Seeing as shorting is dangerous. 

eToro is commission-free, which means there are no ticketing fees, stamp duty, or markup costs for using the app to trade. There are also no management fees at all, even if you use its CopyTrader and Smart Portfolio features to match other moves of other traders. There are also no deposit fees, however, conversion fees do apply. And you’ll find bog-standard trading fees such as overnight fees

Access 52 crypto coins, 32 commodities, 264 types of ETFs, across 13 indices. There are thousands of stocks available, far over 2500. Stocks are 0% commission, give you access to multiple industries, from automotive to healthcare technology, across the globe and emerging markets – without limiting trade volume. 

Crypto is one of the most dynamic markets for short-selling. eToro’s solution is all-in-one: offering you a regulated trading platform, exchange, and wallets that provide a strong variety of leading crypto assets. Although you should keep in mind that crypto-assets are not regulated in some EU countries, as well as Australia and the UK. So any investments in your wallet are not consumer protected. It is up to you to make sure your crypto capital is guarded.

2. IG Markets


Key Features:

  • Inactivity fee: Yes (+ commissions)
  • Account min: $250
  • Leverage: 1:30 standard
  • Over 1250 assets: EFTs, forex, crypto, penny, CFDs
  • Indices incl.: FTSE 100, Cannabis, Dow Jones
  • Highest-traded stocks: Apple, Netflix, Tesla
  • Most popular crypto: ETH, BTC, LTE

Pros

  • Over 200,000 active users
  • Does mostly everything, from forex & penny stocks to to CFDs & EFTs 
  • Large online social network that includes webinars, tutorials, and more

Cons

  • Large fund minimum: $250
  • No zero-commission policy

📓 Reputation    

IG Markets has some protective features of trading by using short-selling, such as setting a minimum market cap for your chosen penny stock. The idea here is to limit how much risk you may be taken on in your portfolio. They also provide up-to-date tips on the best penny stocks by location. Information given will show the share price, movement in price, and the index as well as sector.

Their reviews of recommended penny stocks go pretty deep. They go into good detail on the background of the company, its progress since, reasons why it’s a penny and also why this may change in future. And so on. Trade either short-term or long-term using IG Markets.

This is done through their share dealing account, which also offers dividends if this is offered by that company. There are tutorials for how to actually invest in penny stocks, which are pretty extensive. And includes risks. 

Reasons to use IG markets include cheap dealing costs. There’s also a zero commission on some shares. Grab an enormous choice of investments, with over 12,000 shares, investment trusts, and funds to choose from. The account process is pretty quick, openable in a matter of minutes, with a mobile app to add things. The customer support is all-day, every day, except for the end of Friday and some of the weekend.

3. Pepperstone


Key Features:

  • Commission (varies by broker)
  • Live account min.: AUD$200
  • Leverage up to: 1:30 (or 1:500 for pro)
  • Thousands of assets: forex, crypto, shorts, CFDs
  • Over 89,000 traders active traders

Pros

  • Regulated by two of the strongest retail forex regulatory bodies: ASIC and FCA  
  • Daily trading volume of US $5.8 billion
  • Cutting-edge trading platform

Cons

  • Weighty fund minimum: AUD$200
  • Fee for converting AU dollars to U.S.
  • Has commissions 

📓 Reputation    

Pepperstone is actually based in Australia. Access to an enormous range of financial instruments, with good spreads and commissions.

As well as being able to pick pairs such as EUR/USD and GBP/USD, also get access to commodities like gold and oil, and access indices like the FTSE 100, penny stocks, and spread-betting opportunities. They have a large selection of chart-reading tools and technical indicators. There’s the option to use an automated expert advisor (EA). 

Overall, they’re a low-risk, special interests platform focused on oil and currencies on the FX. And they’re under FCA regulation. They’ve been around since 2010. Reasons for their forming were due to the founders being frustrated with the offerings on the market, which they found to be slow to respond to trading trends and hard-to-use for beginners.

So Pepperstone focuses a lot on technology, commonsense customer service, and is the winner of the ADVFN International Finance Award for Best Forex Platform (2020).

4. CMC Markets


Key Features:

  • Over 1250 assets
  • Commission: Yes (& $50 inactivity)
  • Trading min.: $100
  • 200,000+ users
  • Indexes: 22

Pros

  • Good securities for diversity: CFDs,  EFTs, shorts, forex, crypto, commodities 
  • Match moves of a community 
  • Crypto coins includes dogecoin

Cons

  • Substantial minimum: $100
  • Commissions charged
  • Only 20 cryptocurrencies

📓 Reputation

Thought I’d add this last honorary mention – if you’re looking for a tool that can do short-selling investments, that also has copy trading features. A couple of the other platforms on this guide also have this feature. But AvaTrader is the biggest name besides eToro, at duplicating trades in a non-complicated interface.

Buying Guide


Let’s cover key concepts related to short selling. This will give you more context before starting your new journey:

What is short selling? 💼


Short selling goes against the market, in order to make a profit. 

You sell shares you do not actually own. Meanwhile, interest is racked up on the loan (borrowed shares). You hope a reduction in price, all fees considered, will be great enough that this leaves you with substantial profits after closing the loan (the loan is closed once you repurchase those borrowed shares).

This form of speculation has been historically used by portfolio managers or investors as a way to hedge against risks of slumps in the market or portfolios – which happens often with position traders (traders who hold long positions).

This kind of speculation has its own significant risk and is an advanced trading tactic. It isn’t normally used as pure speculation but in order to hedge. Hedging is more frequently the transaction of this vehicle, i.e. using short selling in order to offset another long position and to therefore lower risk exposure.

Short selling also technically differs in its composition. Equity is not directly offered to the short borrower/seller. Instead, a position is opened by borrowing shares of stock or another security from a brokerage that does own shares in that stock. Once again, the investor thinks this stock will depreciate in value.

The trader then sells those borrowed shares at the market rate. Borrowed shares are given back to the broker; before this happens, the investor expects that its price will have dropped so that it can be purchased at a lower cost. In short, no pun intended, a short seller borrows stock or another security then sells it on the live market, intending to repurchase it later for cheaper. The potential downsides of short sell losses are theoretically infinite because the price of any asset can climb to almost any point.

The ins-and-outs of short selling

Price Decline

To start with, a seller initiates a short position going through a brokerage to borrow shares. They do this with the intention that they can buy them back later at a profit because the price will decline by that point.

Shares cannot be directly owned – but must instead be borrowed – due to the fact that it’s impossible to sell shares that do not exist. In order to end a short position, the investor needs to repurchase the shares on the open market.

The hope is that the price will fall by this point, relative to when they borrowed the asset. But by repurchasing on the open market, this automatically returns those shares to the broker or lender. Keep in mind that traders need to soak up any interest charged by the broker, or trade fees.

Margin accounts 📉

Margin Account

A margin account is required in order to short sell, and interest needs to be paid on the value of borrowed shares during the position’s duration of being open.

Additionally, there are minimum values that the margin account needs to keep in its balance, which is called the maintenance margin. These criteria are enforced and set by FINRA and the Federal Reserve.

Whenever an investor’s account drops below the maintenance margin, additional funds are required, or the position may be forcibly sold by the broker. This reflects the high risk-to-reward ratio of this form of trading.

The actual finding of shares an investor can borrow, as well as their return at the close of a position, is managed on the backend by the broker. This feature is available through most trading platforms. But the eligibility criteria will differ according to each broker – in order for a trader to be able to short sell.

Reasons to sell short


Shot Selling logo

The two most common reasons for short selling are speculation and, most commonly, hedging. Speculators are purely forecasting or betting on the decline of security in the future. A wrong decision means that you will need to buy shares back for more than they paid, eating up the loss.

As mentioned earlier, the potential shortfalls of losses are theoretically infinite. So regulations necessitate that a margin account is used, in order to buffer things. Additional risks associated with the trade approach mean that short selling normally happens across a brief time horizon.

Hedging a long position, by comparison, can lock in gains. Let’s say you own a long position; you could tactically sell short against their position in order to seal profits. Or, in order to damage-control potential depreciation, without needing to leave a long stock position, you can short a stock from a related or very associated stock.

Demo of a short sell at a profit

Let’s set a scene where a trader thinks ABC stock – currently valued at $50 – will depreciate in value across our quarterly period. They borrow a hundred shares then sell them off to a second investor.

This means the trader is now “short” a hundred shares because they gave away something they did not actually own but had in fact borrowed. It was only possible because they were loaned shares. (Note that this isn’t always possible if a stock is already being shorted by a lot of other traders).

A week passes, and the shorted company discloses poor financial performance across the last three weeks, so the stock plummets to $40. The original trader then decides this is the time to end the short position by purchasing a hundred shares at $40 apiece, on the open market.

This returns those originally borrowed shares. And a profit is made on the short job, minus commissions as well as the broker’s interest rate on the margin account – which would be $1000, i.e. 50 from 40 = $10 x 100 shares). 

Demo of a short sell at a loss

Continuing with the example given above, let’s say the trader decided to keep their short position open even after the price dropped to $40 per share; hoping to further capitalise on the downward momentum.

Unfortunately, Elon Musk purchases 10,000 shares then tweets about it. The price per share spikes up to $65 apiece, as the stock rises. The trader decides to cut his losses, before stock prices reach the moon, by closing the short position at $65.

If this happens, the short sale losses would be $1500. In other words, the $15 negative difference multiplied by 100 shares. This means that the trader needs to spend substantially more money to close the borrowed position than was paid to open it.

Demo of a short sell for hedging

Once again, short selling is not only used for speculation means – hedging is commonly viewed as more proper use of shorting, found in respectable financial investment services (e.g. hedge fund managers). It’s a vehicle for fine-tuning investments to personal risk appetites.

The central purpose of hedging is risk management, rather than being purely profit-driven. Hedging mitigates portfolio losses, but because it involves substantial expenses, most retail investors do not use it during periods of normal trading.

In terms of hedging expenses, there were two main costs. The first is borrowing costs. The second, associated expenses; can include stipulations in portfolio management where hedging is a premium add-on. Also the run-of-the-mill trading commissions and dealer-broker interest rates for borrowed shares.

Because it’s a conservative approach, there is an opportunity cost that puts a glass ceiling over a portfolio’s upside in cases where the market gallops ahead. For instance, if half of a portfolio closely tied to the Dow Jones is hedged, and the index rallies up 15% over the year, the portfolio will only register roughly half of this increase.

Play-by-play: What was the GameStop short squeeze?


YOLO

GameStop CORP. (GME) grew overnight from $17.25 to $325.00 between January 4, 2021, to January 29, 2021; representing a nearly 1900% increase in valuation. But despite this price spike, a great number of hedge funds saw vast losses on their investments, cutting their portfolios in half. In fact, a total of $12.79 billion was lost as a result of this particular short squeeze.

How it started

This began when retail investors from r/wallstreetbets bought large numbers of shares of GameStop stocks. The flames were fanned by business mogul and CEO of Tesla, Elon Musk when he tweeted “GameStonks!!” Following the organised short squeeze, the r/wallstreetbets server was banned by Discord and Robinhood stopped the trading of its most volatile “meme” stocks like AMC and the GameStop.

Most stakeholders were investment research firms and hedge funds. For instance, one hedge fund (Melvin Capital) saw a 53% drop in its investments in January. Whereas a few other institutions such as BlackRock, (an investment management firm) held long positions on the stock, and so saw large profits.

In some instances, retail investors invested in GameStop saw double-profits – those who had also lent shares to short-sellers – also saw profits from extra fees from short sellers having to buy back the shares at an inflated price. A tail-end of retail investors came into the market when it was already at its peak.

What are “meme” stocks?

Meme stocks are named as such because the hype around them is built on social media platforms. Shares catch fire through social influences or special threads, such as on Reddit.

A quick trend of the up-swinging prices leads to skyrocketing stocks. But the traditional financial world sees this as extremely risky because they are rooted in strong interest from a small pool of investors, in order for the stock to rocket “to the moon”.

But is it fair to always see meme stocks as too risky? On one hand, they arguably go against the business fundamentals necessary in doing stock analysis. On the other hand, a business that has strong customer backing can eventually grow into a stable company.

Instances of this are no more quickly evidenced than in the cryptocurrency world, where previously unknown digital coins grow into consistently highly-traded coins. The fresh cash injected from new equity also feeds a company that has good starting principles.

Meme stocks typically skyrocket in a matter of days or hours due to a sudden influx of interest online or through social media. A small group of individual investors buys lots of shares. But the searches can often reverse just as fast. So it’s certainly a volatile vehicle. 

FAQs


What is a short squeeze?

Squeezes are a negative feedback cycle or loop triggered by short-sellers, then becoming an avalanche. A stock climbs in price, motivating short sellers to hedge their trades by purchasing their short positions back before the price rises even more.

This observed demand encourages greater supply; more buyers are attracted to the frenzy, which further increases stock prices, and encourages even more short sellers to also cover their positions by buying back short stocks.

What are the disadvantages of short selling

  • Theoretical infinite loss potential
  • Short squeezes
  • Margin account needed, including interest rates

What are the advantages of short selling

  • ☑️ Potential for great profits
  • ☑️ Able to leverage investments
  • ☑️ Small initial funding needed
  • ☑️ Balance against (hedge) securities

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