Going Short

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Qwerty Corp is trading at 222.00 / 224.50. You think that Qwerty Corp is over-valued and the share price may fall so you decide to bet on it going down.

1. You place a down bet (also known as going short) of £1 per point at 222.00 NB Share prices are quoted in pairs – the bid and the offer. The bid or ‘sell price’ is quoted first and the offer or ‘buy price’ is quoted second.
2. Since you are new to Spread Betting you trade the minimum amount of £1 per point, which is the equivalent of 100 shares in the real market.
3. Qwerty Corp is margined at 3% - this means that you only require 3% of the total position’s value to open a trade and this will be allocated from your account as initial margin. In this example, the total margin will be ((222x£1) x 3%) = £6.66. Remember, if the share price moves against you it is possible to lose more than your initial £6.66 margin requirement.

Outcome A: winning trade

Your prediction is correct as the next day Qwerty Corp issue a profits warning and the share price falls by 50 points to 172.00 / 174.50.

1. You decide to close your trade and buy back at 174.50.
2. You have made 47.5 points (222.00 - 174.50) x £1 = £47.50 revenue.
3. As you held the position overnight, you are owed a financing charge. CMC Markets will pay LIBOR - 3% on all short positions (nothing if less than 0). In this case, if the closing price that evening was 190 you would receive £0.01 (190 x £1 x LIBOR (assume 5%) - 3% / 365).
4. Therefore you add the financing charges to the total revenue and realise a profit of £47.51

Outcome B: Losing trade

Your prediction is incorrect as a rumour of a takeover bid means the share price increases by 18 points to 240.00 / 242.50.

1. You decide to close your position at a loss by buying back at 242.50. There is a difference of 20.5 points (222.00 - 242.50) x £1 which is a loss of £22.50 to you.
2. As you held the position overnight you incur a financing charge. The financing charge is £0.06. This is calculated by taking £222 (value of your exposure to the market) x LIBOR + 3% (in this case + 8%) / 365 (number of days in the year) = £0.06.
3. Therefore you add financing charges to the total revenue and realise a loss of £22.56.

This example uses a stake of £1 per point but you can trade in any multiples of £1, for example £ 3 or £10. If you had traded with a stake of £5 in this example you would have made a profit of £237.5 or a loss of £112.50 (plus or minus a financing). Trading with larger sizes increases your risk so make sure you understand the risks involved.