Short-selling is a controversial topic but one that investors need to know about. The practice involves selling shares in a company that you don’t already own, in the expectation that at some later date, the price will have fallen so you can buy them back, close the trade, and post a profit.
YOUR CAPITAL IS AT RISK
For some, betting against real-world businesses that employ thousands of people suggests the financial markets are overstepping the mark. The counter-argument is that without checks and measures, a bad company’s share price can overshoot.
As even retail traders can use online CFD brokers to sell short, this article will explain the basics and introduce some of the nuances associated with the sometimes murky world of short-selling.
Table of contents
- ITM POWER (LON: ITM) — PERCENTAGE OF TOTAL SHARES SHORTED = 5.88%
- ASOS (LON: ASC) — PERCENTAGE OF TOTAL SHARES SHORTED = 5.5%
- OCADO GROUP (LON: OCDO) — PERCENTAGE OF TOTAL SHARES SHORTED = 5.3%
- BOOHOO (LON: BOO) — PERCENTAGE OF TOTAL SHARES SHORTED = 5.1%
- KINGFISHER (LON: KGF) — PERCENTAGE OF TOTAL SHARES SHORTED = 5.1%
- MOONPIG (LON: MOON) — PERCENTAGE OF TOTAL SHARES SHORTED = 4.7%
- HAMMERSON (LON: HMSO) — PERCENTAGE OF TOTAL SHARES SHORTED = 4%
- NAKED WINES (LON: WINE) – PERCENTAGE OF TOTAL SHARES SHORTED = 3.96%
- VICTORIA PLC (LON: VCPL) — PERCENTAGE OF TOTAL SHARES SHORTED = 3.8%
- METRO BANK (LON: MTRO) – PERCENTAGE OF TOTAL SHARES SHORTED = 3.67%
- The Basics of Short-Selling
ITM POWER (LON: ITM) — PERCENTAGE OF TOTAL SHARES SHORTED = 5.88%
ITM Power is a UK-based energy storage and clean fuel business and is currently a favourite of short-sellers. Following the appointment of its new CEO in December, the company has been undertaking a detailed review of its operations. The review clarified to the company that its full-year (ending April 30, 2023) revenue and EBITDA loss would be worse than expected.
Beginning around April 2022, short positions in ITM power began to pick up significantly, with a high of 6.86% of the firm’s shares sold short by January 24, 2023. That has since dipped to 5.88% as some take profits ahead of its upcoming results. As a result, ITM Power’s shares have tumbled significantly since its 2021 highs, where it was trading over the 700p per share mark. They are now around 87p per share.
YOUR CAPITAL IS AT RISK
ASOS (LON: ASC) — PERCENTAGE OF TOTAL SHARES SHORTED = 5.5%
Citadel and Marshall Wace are among the most significant funds short online fashion retailer Asos. Following the lifting of lockdown restrictions, e-commerce firms have mostly struggled as consumers returned to in-store shopping. As a result, Asos has been among the most shorted stocks for several months in the last year. In March 2021, Asos was trading above the 5,800p mark, but it now sits around 830p.
Currently, 5.5% of the firm’s shares are sold short, but it has reduced since October 2022, when it was at 9.46%, with some firms closing out or reducing their position sizes.
OCADO GROUP (LON: OCDO) — PERCENTAGE OF TOTAL SHARES SHORTED = 5.3%
Given the current macroeconomic environment, it comes as little surprise that the shorts in Ocado have been building recently. It is one of the more expensive supermarkets, and lockdown restrictions haven’t been in place for some time now, meaning many customers have moved back to in-store grocery shopping.
The shorts in Ocado are at their highest level for some time and continue to grow, with six out of seven firms adding to their position in the last week or so. 5.3% of the company’s shares are being shorted, but it pales compared to June 2016, when firms were short over 21% of Ocado shares. Given the company’s latest disappointing results and demand for its services continuing to slide, the shorts may continue to build in the near term.
YOUR CAPITAL IS AT RISK
BOOHOO (LON: BOO) — PERCENTAGE OF TOTAL SHARES SHORTED = 5.1%
Boohoo is the second online fashion retailer that makes it onto the top ten most shorted UK stocks list, and like Asos, it has been one of the most shorted UK stocks for several months in the last year or so. This has resulted in its share price tumbling. It now trades at around 50p per share after hitting a high of well over 400p per share during the pandemic. So again, Boohoo is another online-focused retailer that has been significantly impacted by the shift back to in-store shopping, although it has had its own troubles over the past two years as well.
5.1% of Boohoo’s shares are sold short, but it has dipped since October when it was 10%. The company is facing several headwinds, but its shares have made some gains so far in the last few months.
KINGFISHER (LON: KGF) — PERCENTAGE OF TOTAL SHARES SHORTED = 5.1%
Kingfisher is a retailer that owns brands such as B&Q, Castorama, Brico Dépôt, and Screwfix. While firms are shorting the stock, its share price has so far remained somewhat resilient. Despite falling between 2021 and 2022, it experienced less of a decline than some of the other firms on this list and is currently up in the last 12 months and heading higher once again.
In July 2022, 9.1% of its shares were sold short, which has since fallen to 5.1%, although three out of five firms have increased their short positions in the last few months.
YOUR CAPITAL IS AT RISK
MOONPIG (LON: MOON) — PERCENTAGE OF TOTAL SHARES SHORTED = 4.7%
Since going public in February 2021, it’s been all downhill for the Moonpig share price, and the rising number of shorts suggests it could get worse in the near term. Once again, another e-commerce firm makes it onto the list, with the funds short 4.7% of the personalised greeting cards company’s shares. The shorts have been growing since September 2022 and, so far, don’t look like they are slowing down, with JPMorgan Asset Management UK Ltd short 1.52% of Moonpig shares.
Overall, five hedge funds have sizeable short positions in Moonpig, and their recent activity in the market confirms Moonpig’s near-term share price direction hangs in the balance. While two hedge funds have scaled back on their bets, three have increased the size of their shorts in recent weeks.
HAMMERSON (LON: HMSO) — PERCENTAGE OF TOTAL SHARES SHORTED = 4%
The Hammerson share price has had a torrid time over the last few years. It’s plummeted from 700p to around 25p due to the firm’s core business model being decidedly out of favour during the pandemic.
The owner/manager of large retail sites has faced structural challenges, which COVID-19 and a consumer shift towards online shopping exacerbated. Short interest in Hammerson is made up of four hedge funds, with Maverick Capital the biggest shorter of the stock at 1.32%.
However, we may see some of those shorting firms unwind their positions given the shift back, with more people opting to shop in-store once again. In addition, HMSO’s share price plunged more than 11% following its full-year 2022 results, with the company’s revenue falling year-over-year. Hammerson recorded another pre-tax loss, although it did narrow compared to the previous year. The short positions in the stock have been drifting steadily lower since 2020.
YOUR CAPITAL IS AT RISK
NAKED WINES (LON: WINE) – PERCENTAGE OF TOTAL SHARES SHORTED = 3.96%
Majestic Wine is Great Britain’s largest specialist retailer of wine, but its share price has had a terrible time since 2021 and has shown no sign of rising, despite the more recent positive market sentiment. After climbing to above 880p in 2021, it now trades at just under the £1 per share mark. In its latest trading update, the company increased its adjusted EBIT outlook but revealed revenue in the quarter declined.
Meanwhile, three funds (Ennismore Fund Management, Jupiter Investment Management, and SFM Ireland Management) are short the stock, but they have all recently decreased their short positions.
VICTORIA PLC (LON: VCPL) — PERCENTAGE OF TOTAL SHARES SHORTED = 3.8%
Victoria PLC is a designer, manufacturer, and distributor of flooring products. After declining throughout most of 2022, the debt-laden company has made steady gains since August, but it is still nowhere near its 1,200p highs in 2021, with short-sellers last year eyeing the stock.
Short positions in the stock grew throughout 2022 and have remained elevated so far this year, but only two firms have significant short positions in the stock (Boldhaven Management and Coltrane Asset Management). Coltrane is still holding a more than 2% short in Victoria, which last increased in November 2022, while Boldhaven reduced its position in December.
YOUR CAPITAL IS AT RISK
METRO BANK (LON: MTRO) – PERCENTAGE OF TOTAL SHARES SHORTED = 3.67%
One question for short-sellers is, ‘how low do you go’? The Metro Bank share price has been tumbling for several years, and despite a recent rise, the SVB news has impacted the banking industry and seen Metro Bank tumble of late. However, the recent reduction in the percentage of short positions has mirrored its pre-SVB crash upside move. Part of the uptick in price will be funds buying back the stock they shorted at higher levels.
As an innovative disruptor, Metro Bank entered the UK banking sector and initially won industry and consumer acclaim. Unfortunately, it made the error of not getting the basics right and, in 2019, misreported its financial statements. Investors see red flags appear whenever there is an accounting error, particularly if the culprit is a bank.
The Basics of Short-Selling
How it works
At face value, short-selling looks very much like taking a long position. In some ways, it is, but there are subtle differences you need to be aware of, not least because they could blow your account out of the water.
The easy part is that if you short 10 shares in stock ABC at a price of $20, and price falls to $18, your total profit = 10 x 2 = $20.
- Short squeeze — If the price in ABC goes against you, it can technically carry on rising an infinite amount. If it reaches $100, your total loss = 80 x 10 = $800. This loss being four times larger than the size of the trade you initially put on, which was 10 x 20 = $200.
- The much-publicised ‘short-squeeze’ in GameStop left several hedge funds nursing losses of billions of dollars.
- There are additional costs involved in short selling. These accrue daily, so if the sell-off you anticipate will happen takes time to kick-in, you will eat into potential profits.
The Best Ways to use Data
Some time ago, short-selling was much less regulated. Firms could take short positions, and that was that. In a response to claims of market manipulation, authorities now require anyone with a short position of a certain size to report it and sites like Shorttracker collate and report that information.
As with going long, short sales still require traders to get their trade entry and exit points right and this article discusses that part of the process in more detail.
How to Trade the UK’s Most Shorted Stocks
Any online broker offering stock CFDs will support short-selling. There are a lot of good, trusted brokers to choose from, but make sure the one you opt for is regulated by an authority such as the Financial Conduct Authority (UK).
- Sign up for an account using the online registration process
- Fund your account by wiring funds. Brokers support a variety of payment process agents, including debit/credit cards and bank transfer.
- The trading platforms are exceptionally user-friendly, and it won’t take you long to find the stock you want to short.
- Execute your trade — enter the amount you want to buy, consider using the risk management tools stop losses and take profit orders, then click ‘sell’.
- Check your trade — visit the portfolio section to review your activity and make sure you haven’t made any ‘fat finger’ errors.
Best Brokers to buy Stocks:
eToro: 68% of retail CFD accounts lose moneyTake a look
Tickmill: FCA RegulatedTake a look
IG: Over 16k stocks to tradeTake a look
If you are ready to add some stocks to your portfolio you'll need a broker that is regulated, has low fees and a user-friendly platform. Finding one can be a daunting task, which is why we've selected some of our favourites that tick all of these boxes to help you get started.
The core process of short-selling stocks works on the same principles as buying a long position. The execution of the trade using an online broker also follows the same pattern — you just click ‘sell’ rather than ‘buy’.
Tools such as the short tracker can offer an insight into the mood in the market or be a useful tool for those considering Pairs Trades / Long-Short strategies. While it has inherent risks, short selling was originally developed to allow traders to reduce risk on otherwise long portfolios.
A ‘naked short’ just selling outright can be a riskier proposition. Not only are losses potentially infinite, but equity markets tend to rise gradually over a long period, with short and dramatic sell-offs occurring at irregular intervals.
Getting stuck in a short position can be a painful and long drawn out experience. You might be correct in your analysis that a particular stock is overvalued, but if there isn’t a catalyst that brings that fact to the attention of the rest of the market, price can continue to creep up. If that happens, it can feel like you’re enduring a ‘death by a thousand cuts’.