Is short selling legal in Australia?

Yes, short selling is legal in Australia and is regulated by ASIC. However, naked short selling (selling shares without borrowing them first) is illegal.

How do I find out which ASX stocks are heavily shorted?

ASIC publishes daily short position reports that show the aggregated short positions for ASX-listed stocks. Shorted.com.au provides this data in an easy-to-read format with historical trends.

What is Short Selling on the ASX?

Q: What is short selling on the ASX?

Short selling on the ASX is a trading strategy where investors borrow shares from another party, sell them immediately, and hope to buy them back later at a lower price. The difference between the sale price and buyback price is the profit (or loss).

Introduction to Short Selling

Short selling is a trading strategy that allows investors to profit from falling stock prices. While most investors follow the traditional "buy low, sell high" approach, short sellers do the opposite - they sell first and buy later, hoping the price will fall in the meantime.

How Short Selling Works

The process of short selling involves several steps:

Borrowing shares: The short seller borrows shares from a broker or institutional investor who owns the stock.
Selling the borrowed shares: These borrowed shares are immediately sold on the market at the current price.
Waiting for price movement: The short seller waits, hoping the stock price will fall.
Buying back shares: Eventually, the short seller must buy back the same number of shares to return to the lender.
Returning shares and collecting profit/loss: The difference between the selling price and buying price determines the profit or loss.

Example

Imagine a short seller believes Company XYZ, currently trading at $50, is overvalued. They borrow 100 shares and sell them for $5,000 total. If the stock falls to $40, they can buy back 100 shares for $4,000, return them to the lender, and pocket the $1,000 difference (minus fees and interest).

Why Investors Short Sell

There are several reasons investors engage in short selling:

Profit from overvaluation: When investors believe a stock is overpriced, they can profit by betting against it.
Hedge existing positions: Investors may short sell to protect against potential losses in their long positions.
Market efficiency: Short sellers help identify overvalued companies, contributing to more accurate stock prices.

Risks of Short Selling

Short selling is considered a high-risk strategy. Unlike buying shares where the maximum loss is limited to your investment, short selling has theoretically unlimited loss potential because stock prices can rise indefinitely.

Unlimited loss potential: If the stock price rises instead of falls, losses can exceed the original investment.
Short squeeze risk: If many short sellers try to cover their positions simultaneously, it can drive the price up rapidly.
Borrowing costs: Short sellers must pay interest on borrowed shares, which can be substantial for hard-to-borrow stocks.
Margin requirements: Brokers require short sellers to maintain margin accounts with sufficient collateral.

Short Selling Regulation in Australia

The Australian Securities and Investments Commission (ASIC) regulates short selling on the ASX. Key regulations include:

Reporting requirements: Significant short positions must be reported to ASIC, which publishes aggregated data daily with a T+4 delay.
Naked short selling prohibition: Selling shares without first arranging to borrow them is illegal.
Disclosure obligations: Market participants must disclose substantial short positions.

Getting Started

Before engaging in short selling, investors should thoroughly understand the mechanics, risks, and regulatory requirements. Using tools like Shorted.com.au to track short positions can help identify heavily shorted stocks and potential opportunities.