One of the major advantages of spread betting and CFD trading is the ability to profit from falling markets if your prediction is correct. This is achieved by going short (selling) on a market. However, when trading shares, there’s an additional cost to consider: the short borrow charge. Let’s break it down.
Imagine this: you’re watching the markets, and you think a company’s stock is going to drop in price. What if I told you that instead of just sitting back and watching, you could actually make money from that drop? That’s what short selling is all about—but there’s a little cost involved, called a short borrow charge. Let me explain it super simply.
Short selling comes with costs and risks you need to understand, like the short borrow charge
How Does Short Selling Work?
Okay, here’s how it goes:
- Borrow Some Shares: When you want to short a stock, you’re basically borrowing shares from someone who owns them.
- Sell Those Shares: You sell the borrowed shares at today’s price, hoping the stock price will drop.
- Buy Them Back Later: Once the price drops (hopefully), you buy back the shares at the lower price.
- Return the Shares: You give the shares back to the person you borrowed them from.
The difference between the price you sold them for and the price you bought them back for is your profit. Sounds cool, right?
The Borrowing Fee (AKA the Short Borrow Charge)
But here’s the catch—borrowing those shares isn’t free. There’s a daily fee called a short borrow charge. How much you pay depends on the stock:
- Easy-to-Borrow Stocks: If lots of people are lending out this stock, the fee will be lower.
- Hard-to-Borrow Stocks: If it’s a stock that’s tricky to borrow, the fee can get pretty steep—like up to 10% of the stock’s value per year, and sometimes even more!
Why Do I Need to Pay a Fee?
The short borrow charge exists because you’re using someone else’s property—their shares. When you borrow shares, the broker arranges this by finding someone willing to lend them. That lender wants to be compensated, and the broker passes that cost on to you as the borrower.
The fee also depends on how much demand there is to borrow the stock. If lots of traders are trying to short the same stock, there’s a limited supply of shares to borrow, so the cost goes up.
So, How Do You Know the Fee?
The cost of shorting a stock can vary, but here are the key factors that affect it:
- Stock Availability: If the stock is widely available, the fee will be lower.
- Market Conditions: When a stock is in high demand for short selling, the fee goes up.
- Broker-Specific Fees: Some brokers charge more than others, so it’s worth comparing.
If you’re curious about how much this fee would be before you open a short trade, you can just ask the dealing desk at the spread betting or CFD provider. They’ll give you the exact rate for the stock you’re looking at. Just remember, the fee can change if the stock becomes harder or easier to borrow over time.
If you’re trading with a spread betting provider, for example, they might charge you the same rate as the underlying market for borrowable stocks. But if the stock isn’t borrowable in the market, they may still let you short it, though at a higher cost.
So, there you go! Short selling can be a great way to trade when markets are falling, but always keep that borrow charge in mind—it’s like the “rent” you pay to borrow the shares. Got it? Cool!
