How Do You Short Sell a Contract For Difference (CFD)?

 

Short Selling used to be the domain of only the professional or sophisticated investors/traders who had access to a full service broker and didn’t mind paying the exorbitantly high brokerage rates. Since the introduction of CFDs around the world for the retail trader, we now all have access to the simplest possible way to short sell for profits.

So what exactly is short selling?

The ability to short sell is the process of selling something you don’t own with the hope to buy it back at a cheaper price sometime in the future. As opposed to products like Futures or Options, there is no time expiry on a Contract for Difference so you can hold it for as little or as long as you like.

What are the costs involved when looking to sell short?

The CFD brokers actually pay you for short selling which usually startles most people when they hear that. If you are trading an index CFD or a commission free product, then there are no brokerage fee’s associated and you normally earn interest for every day you hold the position short. It’s an amazing concept and one that most people struggle to get their head around.

Selling first and buying back later (hopefully cheaper)

Your goal when short selling with CFDs is to sell say at $12.00 with the hope of buying it back at a cheaper rate of say $10.00 and profiting the $2.00 difference. Whilst most people try to complicate the process, short selling is just the exact opposite of trading long and you’ll pick it up very quickly.

Why is my potential loss unlimited?

As with trading long, trading short involves using sensible stop loss strategies and effective money management. The biggest downside with short selling is the potential for unlimited loss as a stock can continue to rise much more than you and I have money to cover. When trading long the worst that can happen is the stock goes to zero and you lose everything but with short selling the position can continue to rise against you for a long, long time exposing you to potentially unlimited losses. Some of the greatest portfolio blowups of all time involve short selling.

The rule of thumb with trading generally is to always protect your downside risk, trade within your means and always use stops and sensible money management. If you stick to these broad and effective rules, you won’t be too far away from consistently making money in the markets. Good luck with your trading.

Related Posts




Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!



10 Most Popular Search Terms