What is Short-Selling?
Short-selling has long been a popular trading strategy amongst investors looking to benefit from market downturns or hedge their positions. But how does short-selling work, and why is this trading strategy used? If you’re a beginner to short selling, this article will help you understand the following concepts:
No Slippage
Trades are executed at the rate you see, on easyMarkets platforms ensuring you will never be surprised by a spread change during volatility.
Tight Fixed Spreads
As part of our Price Transparency Promise, our spreads never change during trading hours, so you know your costs upfront.
Free Guaranteed Stop Loss
Protect yourself and your open trades against runaway losses. A standard feature on easyMarkets Web & App Platforms.
Negative Balance Protection
Another condition offered as a standard feature on easyMarkets accounts, this ensures you are protected when you trade.
No Slippage
No Slippage
Trades are executed at the rate you see, on easyMarkets platforms ensuring you will never be surprised by a spread change during volatility.
Tight Fixed Spreads
Tight Fixed Spreads
As part of our Price Transparency Promise, our spreads never change during trading hours, so you know your costs upfront.
Free Guaranteed Stop Loss
Free Guaranteed Stop Loss
Protect yourself and your open trades against runaway losses. A standard feature on easyMarkets Web & App Platforms.
Negative Balance Protection
Negative Balance Protection
Another condition offered as a standard feature on easyMarkets accounts, this ensures you are protected when you trade.
What is Short-Selling?
Short-selling, or a short sale, is a strategy used by investors to try and benefit from falling asset prices. Typically, traders will short shares, but it’s a strategy that can also be applied to other assets such as commodities, cryptocurrencies, indices and forex.
Traders tend to sell short when they are skeptical about an asset’s short-term performance. For instance, if a trader believed Tesla had a high valuation compared to other car manufacturers, they could open a short sell position to try and capitalize on a potential share price decline.
Shorting can also be used to hedge against downward price movements. So, if a trader believed their portfolio might lose some of its value and wanted to protect themselves from potential losses, they could open a position in the opposite direction to the original position.
How Does Short-Selling Work?
Traders typically execute short selling on assets like shares. To short a stock, a trader will first borrow the shares from a broker. After borrowing the shares, they will immediately sell the shares and look to purchase them back later at a lower price. Say the asset does fall in value, as they anticipated. In that case, the trader will pocket the difference between the selling price and purchase price after returning the shares to the broker.
Another way to benefit from the decrease in the price of an asset is via derivative products like CFDs. With this trading method, you can trade the price movements of an asset without having to own it. So, when a trader expects the price of an asset to fall, they can simply open a sell position with a broker. This selling method is often preferred among traders, as it’s more straightforward than physically acquiring an asset.
Another way to benefit from the decrease in the price of an asset is via derivative products like CFDs. With this trading method, you can trade the price movements of an asset without having to own it. So, when a trader expects the price of an asset to fall, they can simply open a sell position with a broker. This selling method is often preferred among traders, as it’s more straightforward than physically acquiring an asset.
What Is an Example of a CFD Sell Position?
A profitable sell example:
Let’s say you believe that Ford’s share price is overvalued, and it’s due for a pullback. You, therefore, decide to short the company.
The company’s share price is $14. You decide to open a position to sell 100 shares, bringing the total tradeable amount to $1,400. A day later, Ford’s share price has fallen by 5%, falling from $14 a share to $13.30.
As you correctly predicted the decline, you ended up pocketing $0.70 per share, which equates to a total profit of $70.
A losing sell example:
This time, you believe that Coca Cola’s share price is trading above its intrinsic value, and it’s due for a pullback. You, therefore, open a short position.
The company’s share price is $55. You open a position to sell 100 shares, bringing the total tradeable amount to $5,500. A day later, Coca Cola’s share price has risen by 2%, from $55 a share to $56.10.
As the share price rose, you ended up losing $1.10 per share, which equates to a total loss of $110.
Advantages and Disadvantages of CFD Selling
Advantages
Benefit from falling asset prices.
You don’t need to own the underlying asset.
It’s possible to use leverage to gain exposure to larger positions.
It can be used as a hedging tool to protect yourself from short-term market volatility.
Disadvantages
There’s a high exposure to losses if your trade moves against you.
Swap fees can accumulate if your sell position is open for a long duration.
How to Sell a CFD Instrument with easyMarkets
Create an account and log in
Create an account with easyMarkets if you don’t already have one. After this, go ahead and login to your account.
Select the instrument you want to trade
We have 200+ instruments to trade from, including cryptos, shares, indices, commodities, and metals.
Time to go short
After selecting your instrument, you’ll need to open a sell position by pressing the ‘SELL’ button.
Set your stops and limits
Use easyMarkets unique risk management tools like guaranteed stop loss, dealCancellation and Freeze Rate to mitigate the risk of losses.
Monitor your trade
After your sell position is open, monitor the trade closely to assess the performance.
Close your position
If your prediction is correct, you’ll benefit from the price decrease. If the price increased instead, you’ll make a loss.
Selling FAQs
If a trader goes blindly into a sell position without a thorough understanding of what it is and how it works, then it can be considered very risky. However, if a trader has a clear trading strategy and uses proper risk management tools, then they can limit their exposure and reduce the likelihood of losses. With easyMarkets, you can take advantage of innovative tools such as dealCancellation, Freeze Rate, negative balance protection, and guaranteed stop loss.
easyMarkets doesn’t charge any fees or commissions to sell an instrument, the only fees we charge is the spread and swaps for trades carried overnight.
easyMarkets allows you to start trading with just a minimum deposit of $25.
There are certain situations where it may be advantageous to sell an instrument. For instance, if a company announced lower future earnings guidance, or perhaps when a company is trading at an unreasonably high rate, then it could be beneficial to sell. These are, of course, just a couple of basic examples, and every trader should do their own research to determine when they feel it may be appropriate to sell an instrument.
With easyMarkets you can sell all types of instruments – forex, shares, indices, commodities, metals and cryptos.
One of the biggest benefits of using easyMarkets is that you’re trading with a secure and regulated broker that has been operating for 20+ years. We’re licensed by multiple regulatory bodies around the world, including CySEC in Europe and ASIC in Australia. This licensing ensures we abide by strict standards to protect you and your assets.
When shorting instruments with easyMarkets platforms, you can take advantage of our innovative risk management tools. Tools such as dealCancellation, Freeze Rate, negative balance protection, no slippage and free guaranteed stop loss can help mitigate your risk and protect your capital.
You’re also not limited to what you can sell. With easyMarkets Web, App and MT4, you can sell 200+ instruments, including shares, indices, metals, commodities, and currencies.
