Three ways to reduce short selling risk

There are plenty of targets for short sellers at the moment. But shorting is risky and can backfire. Here, Tim Bennett lists three ways to make sure you don’t get caught out.

With the euro crisis back in the headlines, there are plenty of targets for short sellers investors who like to bet on prices falling rather than rising. Over the last few days, as Greece has threatened to leave the euro and the scale of Spanish debt woes has become ever more apparent, it hasn't just been the euro that's fallen. Major indices such as the CAC (Paris), Dax (Frankfurt) and our own FTSE have also taken a beating. However before jumping in and joining the fray, be aware that shorting is risky and can backfire badly. Here's why and how to limit the damage.

Short sellers target things - currencies, shares, commodities, bonds, etc - that are overvalued. So they open sell trades initially, wait for the asset in question to drop and then close their positions with a buy trade. For example, as a spread better, if you think the FTSE 100 will drop from 5,400 points, you sell it and then hope to buy it back at 5,300. Your profit is the 100-point drop times the amount you bet per point.

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Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.