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Why is it not possible to sell short on the Australian Stock market?

Actually it is possible to sell short on the Australian stock market. It is a common misconception that short selling is not allowed.

There is an article entitled Short Selling on the Educational Articles page of my free access web site that explains how short selling is done on the ASX.

It is true however, as explained in the article, that it is not possible to short all stocks. They have to be on the approved list. However, the list is quite extensive.

Where the misconception comes about, I think, is that short selling is more difficult to arrange than buying and, for that reason, it is reasonable to expect that brokers are going to want to charge additional brokerage, or only entertain it for large transactions, where the size of the order justifies the time and trouble. Although brokers can and do execute short trades for large professional clients, it seems that they often simply tell retail clients that they do not do short selling (which may be true), or that the ASX does not allow it (which is not true for the stocks on the approved list). I think they do this because it is easier than entering into a long discussion, when they know the client does not do big enough business to make it practical.

If you think you are likely to be able to trade the size that would interest your broker, try asking the minimum order needed before they will do a short sale for you. You might get a different answer. If you get nowhere on that, try emailing the ASX (contact them through their web site) and ask them for a list of brokers who will do short selling.

However, if you do not think you are able to trade the size necessary, there are other ways to do the same thing. You could use put options or put warrants. However, I do not recommend these, I am only telling you that it is possible. Options and warrants, like all derivatives involve leverage and higher risk than investing in the underlying shares. They are also games that favour the market maker rather than the trader. Finally, they are highly risky, because they often entail 100% loss - much more frequently than when buying the underlying shares.

When you are thinking about shorting shares, you should bear in mind that shorting, unlike buying, can involve unlimited risk. Sure, the situations when it happens are not frequent, but the possibility does exist. The best example would be a takeover. A share is falling below $1. You short it. Someone makes a takeover at $2. You lose over $1 per share. It does happen.