Think Facebook is going bust? Here’s three ways to short the stock (plus the risks involved).

Facebook has recently had it’s hand slapped, for being naughty and as history has a habit of repeating itself (cough cough myspace, friends reunited) here are a few ways to take a short position on Facebook’s share price going down.

If you think that Facebook’s share price is going down then you can put on short position to profit from a falling market. Here’s a quick guide to shorting Facebook stock, the risks, the potential rewards, they types of trading and the brokers that offer Facebook shorting.

What are the risks of shorting Facebook?

  1. Unlimited potential losses: The main risk is that share prices can go up indefinitely, but only down to 0. So in theory, if you are shorting Facebook stock you potential losses are infinite. Also, if the company is bid for or a takeover rumour emerges the share price will surge.
  2. Over leverage: Shorting shares is generally done on margin. Using leverage to trade means that you get exposure to more stock than funds on account. So for example, if the margin rate for Facebook is 10% you can short $10,000 worth of stock with only $1,000 on account. If the stock drops 50% you make $5k, but if it rallies, just 10% you’ve lost all your money.
  3. Currency Risk: Facebook is an American stock so there is a currency exposure. If the GBPUSD rate changes significantly, this can wipe out all your profits. You can avoid this through by trading a GBP position in a USD stock with a spread betting or CFD broker.

Potential rewards of shorting Facebook

  1. You can profit when the stock goes down. Shorting stocks, is not a new principle for UK investors. Spread betting and CFD trading have been around for years. Spread betting and CFD traders have been speculating on currencies, indices and stocks going up and down for decades. Shorting is of course an excellent tool for protecting long term investments against short term downtrends. But also provides a trade for short term speculation. It is risky though, so always make sure you understand the risks involved.
  2. Receiving income from overnight financing. When you trade on leverage there is an overnight financing charge for long positions. Most accounts are set to charge 2.5% over/under 1 month LIBOR (or thereabouts). What this means is that if you are long, you have to pay 2.5% plus the 1 month LIBOR rate to hold the position. But, if you are short you should receive the interest. In practice though (at the moment) interest rates are so low the short credit ends up negative so you check with your broker if you actually pay interest on short positions.

Different ways to short Facebook stock.

  • Spread betting – take a $ per cent bet on the stock. Spread betting is one of the most popular ways for private investors to short US stocks. Commissions are worked into the spread, so you just see one price. Profits are also tax free.
  • CFDs – are a contract for difference between the opening and closing prices of a trade. Spread betting tax benefits are unique to the UK so Europeans trade CFDs instead. CFDs are also useful for larger more tax efficient traders who want DMA (Direct Market Access) to get better pricing.
  • Options – this gives you the right to sell a certain amount of stock at a certain level in the future. You don’t have to which is why it’s called an option. If you think a share price is going down, you would buy a “put” which gives you the right to sell stock at a certain price. The price of a put will increase the further down the stock goes, allowing you to sell the put at a higher price and therefore making a profit on the options.

Brokers that offer shorting on Facebook stock

  1. IG – one of the largest spread betting and CFD brokers in the world. They provide access to shorting US stock including facebook.
  2. eToro – a social broker where you can short Facebook stocks, plus you can copy other traders who speculate on facebook. eToro has one of the world’s largest trading communities.
  3. Saxo – if you want to trade options on Facebook Saxo have a good online equity options offering. A clear pricing table and good voice brokers to work orders for you.

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