Shorting CFDs or Shorting Stocks? Is Shorting Legal?


Q.: Is there any advantage of shorting CFDs as opposed to shorting stocks?

A: Over the counter CFDs are generally cheaper and easier to use for shorting a stock.

Another advantage is availability. A broker has to have shares lent to them available for you to short. During the best times for shorting there will very few stocks left for us! Contracts for the Difference on the other hand just trade the difference in price and stock do not necessarily change hands, especially with the market maker model. CFD brokers also have demo accounts where you can practice losing pretend money. A good way to see how they work.

 

Q.: Is short selling legal?

A: Yes. It's a standard and completely legitimate investment technique. However, there are constraints. For instance in the UK you are not allowed to take any action intended to distort the market and a concerted attempt to drive down the market value of a company by short-selling its shares is, in theory, illegal. However, the bar is set quite high for a successful prosecution: it is entirely legal to sell a company short if you have reason to believe that the price will fall, or if you have good reason (but not 'insider' knowledge!) to believe that it should fall and is currently overpriced. It's only illegal if your primary goal is to drive down the price by short-selling and that would be a very difficult thing to prove in a court of law.

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If I lay a horse to lose on Betfair there is a completely transparent audit trail.

If I train the horse, or work in the yard, and something suspicious slows the horse down... the rozzers will turn up to arrest me [after I've gone to work like Mayhew ;) ].

If I own the horse, I'm not quite sure, but I imagine I could honestly lay the bet to hedge my costs...

So, simply, the process with financial instruments needs to be the same.

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