Short Selling in Australia — How ASX Short Selling Works

Updated

Short selling is a strategy where an investor borrows shares and sells them, hoping to buy them back later at a lower price — profiting from the difference. It is the opposite of the usual “buy low, sell high” approach. Short selling is a legitimate but high-risk activity on the ASX, primarily used by institutional and sophisticated investors.

How Short Selling Works

Standard investing (long position): Buy shares → share price rises → sell at higher price → profit

Short selling:

  1. Borrow shares from a broker or institutional lender (paying a borrowing fee)
  2. Sell the borrowed shares at the current market price
  3. Wait for the share price to fall
  4. Buy the same number of shares at the lower price
  5. Return borrowed shares to the lender
  6. Profit = sale price - purchase price - borrowing fees

Example:

  • You short sell 1,000 shares of Company X at $10.00 → receive $10,000
  • Share price falls to $7.00 → you buy 1,000 shares for $7,000
  • Return shares to lender
  • Profit: $3,000 (minus borrowing fees and brokerage)

The Key Difference: Unlimited Losses

With a standard long investment, your maximum loss is 100% of what you invested (the share goes to zero). With a short position, your loss is theoretically unlimited — a share can keep rising indefinitely.

Example:

  • You short sell Company X at $10.00
  • Instead of falling, the price rises to $30.00
  • You must still buy at $30.00 to close the position → loss of $20 per share
  • At $50.00 → loss of $40 per share

This is why short selling is considered high-risk and is primarily practised by experienced, professional investors.

How to Short Sell in Australia

Retail investors in Australia cannot easily short sell individual ASX shares — it requires a margin lending facility and access to stock borrowing. Most major retail brokers do not offer short selling to standard retail clients.

Options for retail investors who want short exposure:

  • Inverse ETFs — ETFs that rise when an index falls (BetaShares Australian Equities Bear Hedge Fund — BEAR)
  • CFDs (Contracts for Difference) — derivatives that allow short positions, but with high leverage and significant risk (ASIC regulates CFD providers; product disclosure statements required)

Short Position Data on the ASX

ASIC publishes weekly short position data for ASX-listed securities — showing which stocks have the highest proportion of shares shorted. This is publicly available and often tracked by investors as a sentiment indicator.

A high short interest in a stock can mean:

  • Professional investors believe the company is overvalued or has problems
  • There is a risk of a “short squeeze” if the price rises unexpectedly

Short squeeze: If a heavily shorted stock rises (instead of falling), short sellers must buy to close their positions — further pushing the price up. This positive feedback loop can cause sudden, sharp price spikes. The US GameStop situation in 2021 is the most famous recent example of a short squeeze.

Risks of Short Selling

  • Unlimited loss potential — losses grow as the price rises, with no ceiling
  • Margin calls — if the share price rises significantly, your broker can demand additional cash (a margin call) or forcibly close your position
  • Borrowing costs — stock borrowing fees reduce profitability and accumulate daily
  • Timing risk — a company can remain overvalued for much longer than you can sustain the position
  • Short squeeze — coordinated buying by retail investors can force short sellers out at a loss

Yes, short selling is legal in Australia with ASIC-regulated restrictions:

  • Covered short selling — legal; you have borrowed the shares before selling
  • Naked short selling — generally prohibited; selling shares you have not borrowed and cannot reasonably acquire
  • Short positions above a threshold must be reported to ASIC

Frequently Asked Questions

Can retail investors short sell on the ASX? Most standard retail brokerage accounts in Australia do not offer short selling. You would need a margin account and access to stock borrowing — usually available only to more sophisticated investors. For retail investors wanting to profit from falling markets, inverse ETFs or ETFs that track volatility are more accessible (but still risky) alternatives.

How do I find ASX short position data? ASIC publishes weekly aggregate short position data at asic.gov.au. Many financial data platforms (Simply Wall St, Market Index) also display short interest data for individual ASX stocks. High short interest does not automatically mean the stock will fall — professional short sellers are sometimes wrong, and heavily shorted stocks can be subject to violent short squeezes.

What is a short squeeze? A short squeeze occurs when a heavily shorted stock rises in price, forcing short sellers to buy shares to close their losing positions. This buying pressure further pushes the price up, triggering more short covering — creating a rapid, self-reinforcing upward price spiral. The GameStop (GME) short squeeze in January 2021 in the US is the most well-known modern example.

This article provides general financial information only. Short selling is a high-risk activity and is not appropriate for all investors. For advice tailored to your situation, speak with a licensed financial adviser. You can find one through the ASIC financial advisers register or MoneySmart.