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This is one of the main benefits and being able to bet on markets going down is a useful tool in post speculation and hedging with spread betting.
The principle of shorting stocks is not new, professional traders and hedge funds have been doing it for years. It works like this:
- Fund A thinks the price of Vodafone will go down and they want to bet on a drop in the short term (a few months).
- Fund A knows that Fund B has a long term (a few years) position in Vodafone shares.
- Fund A asks to borrow Fund B’s Vodafone shares so they can sell them to someone else.
- Fund B lends Fund A the Vodafone shares and charges 5% of the value as a fee.
- Funds A sells the Vodafone shares on the London Stock Exchange
- A month later Vodafone shares have dropped in price and Fund A buys them back.
- Fund A then gives the shares back to Fund B.
For the private spread betting investor it is much simpler. They just bet a certain amount per point that the shares will go down. There is not need to worry about borrowing stock from anyone.
The spread betting broker will either net the position off against one of their clients that is long, or will borrow the stock just like Fund A did in the example above. Then give it back when the client closes their position.
Obviously this example is based on a single trade and the intricacies of a brokers stock lending and borrowing team are much more complex that this.
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