What is a margin loan? Why should ordinary investors understand it? Complete operation guide

What Is Short Selling Trading Anyway

Many people face a choice when opening a securities account: a cash trading account or a margin trading account? The difference is actually quite simple.

Cash trading means buying and selling stocks with your own money, and all profits or losses belong to you. But if you encounter situations where you don’t have enough funds to buy a certain stock, or want to sell a stock you don’t own, you need to use margin trading — borrowing funds or stocks from the broker, which is where short selling comes in.

The essence of short selling is straightforward: borrow stocks from the broker → sell immediately → wait for the stock price to drop → buy back and return to the broker → profit from the price difference. This is what’s called “shorting” or “short selling.”

How Does Short Selling Work? An Example Will Help

Suppose an investor is bearish on Apple (AAPL)’s earnings report. On August 3rd, they short 100 shares at a closing price of $191.17 per share. The earnings report turns out worse than expected, and on August 4th, the stock drops to $181.99 per share, so the investor buys back immediately.

Profit calculation is simple: (191.17 - 181.99) × 100 = $918 (not including fees).

Sounds good, right? But don’t rush — the fees are the real trap.

List of Short Selling Costs: Not All Costs Are Visible at a Glance

Basic trading fees (same as regular stocks)

• Transaction tax: 0.3% of the transaction amount
• Commission: about 0.1425% of the transaction amount, negotiable with the broker

Three Major Costs Unique to Short Selling

1. Borrowing Fee (Interest on Short Position)

This is similar to paying interest when borrowing money from a bank. The annual rate for Taiwan stocks is usually between 0.1% and 0.4%, but the actual rate is determined by the broker and fluctuates based on supply and demand.

Example: After short selling, if you buy back after 7 days with an annual interest rate of 0.4%, the borrowing fee is approximately 0.4% × 7/365 ≈ 0.00767%.

2. Margin Requirement

Since you are selling borrowed stocks, the broker must set a risk buffer. Typically, Taiwan’s market requires a margin of 90% of the short position’s market value. During volatile price swings or if the broker’s risk control policies differ, this ratio may be increased.

3. Borrowing Fee (Additional Fees from Some Brokers)

Besides interest, some brokers charge an additional transaction handling fee of about 0.08% of the transaction amount.

Comparison of Short Selling Fees Among Major Taiwanese Brokers

• Yuanta Securities: 0.2%
• KGI Securities: 0.2%
• Fubon Securities: 0.2%
• Cathay Securities: 0.2%
• Fubon Securities: 0.1%

Tip: US stock short selling costs vary even more. Borrowing rates range from 0.1% to over 100%, and some hot-to-borrow stocks (hard-to-borrow) can have annual rates exceeding 100%. Margin requirements are usually no less than 100% of the stock’s value, sometimes exceeding 150%.

The Three Major Risks of Short Selling You Must Know

Risk 1: Short Squeeze

Imagine many investors simultaneously short a stock and borrow shares. If the stock price rises instead, these short sellers are forced to buy back to cut losses, pushing the price even higher, creating a vicious cycle. This is a short squeeze.

The 2021 GameStop (GME) incident is a classic example. The company was heavily shorted due to skepticism about its business model, but when new investors took control of the board, the stock price suddenly surged. Short sellers faced huge unrealized losses and were forced to buy back, further driving up the price, leading to a short squeeze frenzy.

Risk 2: Forced Buy-In

Short selling essentially means borrowing stocks from the broker, so you are not a shareholder. When the company holds a shareholders’ meeting or issues dividends, the broker will require you to return the borrowed stocks by a certain date — this is called a “forced buy-in.”

In Taiwan, there are generally two forced buy-in dates per year: before the shareholders’ meeting and before ex-dividend date. The peak period is around May-June, with a deadline typically two months before the meeting. So, around March, you should start paying attention to short buy-in dates.

If you fail to buy back before the deadline, the broker will forcibly close your position at the market price, and all costs will be borne by you.

Risk 3: Insufficient Margin Leading to Forced Liquidation

If the stock you short continues to rise, your account’s margin may fall below the broker’s maintenance margin requirement. The broker will demand you to top up your margin; if you don’t, they will forcibly close your position, and you bear the losses.

Short Selling Strategies: Only the Smart Use It This Way

Given the costs and mandatory buy-in obligations, long-term holding is simply not practical. The following two strategies are the proper ways to use short selling.

Strategy 1: Short-term Trading Based on Major Events

If you anticipate a company’s upcoming earnings report will be poor, or a product launch will disappoint the market, you can short the related stock in advance. When the price drops, close the position for profit.

But beware: If the earnings beat expectations or the new product surprises positively, the stock may gap up, causing significant losses for short sellers. Therefore, it’s crucial to control the size of your short position and monitor stock movements closely.

Strategy 2: As Part of a Hedging Portfolio

This is a relatively low-risk approach. For example, you are bullish on a certain oil and gas stock but worry that the entire energy sector downturn might drag down your portfolio. You can do two things simultaneously: buy the oil and gas stock you like, and short the underperforming oil and gas stocks to hedge sector risk.

Execution tips: The size of your short positions should match your long positions. Consider the beta of the stocks (their volatility relative to the market). When necessary, short multiple stocks to build a more balanced hedge portfolio.

What Is Short Selling? Final Advice

Short selling sounds attractive with its potential returns, but it’s a double-edged sword. It’s suitable for risk-aware investors who can make quick decisions for short-term trading or hedging, and not for long-term holding or retail investors with limited capital.

Each broker’s borrowing rates and fee details differ, so always clarify these before trading. Although short selling costs may seem small, they can accumulate into significant expenses for frequent traders. Fully understanding the costs, risks, and mandatory buy-in mechanisms is essential to survive longer in this game.