This is because short sales incur fees that you may not otherwise encounter when investing in stocks in the traditional sense. At the top of this overnight funding. But before we get to that, let's look at commissions and spreads.
Commissions
If you use an online trading platform you will probably have to pay a commission. This is charged every time you place a buy or sell order. Therefore, you will have to pay the commission twice - when you open and when you close.
- Suppose your chosen broker charges a commission of 0.3%.
- You place a sell order for Nike shares for 1,000 USD
- The broker charges you 3 USD
- When Nike shares fall to 900 USD, you decide to cash in your profits by placing a buy order
- This closes the trade, although you again have to pay a commission of 0.3% - that's 2.70 USD
- All in all, the total commission for your Nike short sale cost 5.70 USD
As mentioned earlier, you can avoid using a commission if you use one of our recommended CFD brokers. Instead, you only need to consider the spread fee and overnight funding fee.
Spreads
The spread is simply the gap between the buy and sell price of your chosen stock CFD. It is best to calculate this as a percentage, as this will allow you to judge how much you need to earn to break even.
- For example, you want to short HSBC shares
- Your broker offers a selling price of 20.73 pence
- Your broker offers a buy price of 20.77 pence
- The spread is 0.2%
- This means that when you open your short sale, you are immediately 0.2% in the red
- Only if the HSBC shares fall by at least 0.2% you are in profit
Most CFD brokers we recommend offer tight spreads, so you can keep your short sale fees to an absolute minimum.
Overnight financing fees
You can't avoid this particular fee when shorting stocks. Simply put, it's a fee you have to pay for each day you keep your short position open. But why? Well, you have to use CFDs to sell stocks online - and CFDs are leveraged products.
Even if you don't use leverage (trade on margin), this is still the case. As you may know, leveraged products come with interest rates that vary by asset. The crust, however, is that this weighs on your trading profits. The overnight rate is set as an annual percentage, but is actually calculated daily. In fact, the fee comes into play when the particular market closes for that day.
As such, if you were to short sell stocks via a day trading strategy in Exness - forexexness.org, you would not have to pay any fees. The moment the market closes - and you still have a CFD position open - the fee is deducted from your position.
In terms of how much overnight funding actually costs, it ultimately depends on your chosen broker. The good news is that it's often not as much as you might think. In fact, some CFD brokers offer overnight funding for stocks at an annual rate of between 3% and 5%. Simply put, you could keep your short position open for 12 months as long as you earn more than the annual financing rate!
Eleena Timmons