Short-selling isn’t linked with the traditional buying low while selling it high in the market. However, short selling can serve as a very useful tool especially when finding opportunities even with the falling markets in CFD Trading.

What does short-selling mean?

Short selling a form of trading strategy that allows traders to take advantage even with the falling market. If you choose to short sell, you will be selling a borrowed asset hoping that the price will go down and then you will buy it back once again later on to gain profit. Other terms for short-selling are going short or shorting. Most of the time, short selling is made on CFDs, shares, indices, and Forex.

Short Selling Works By Borrowing The Underlying Asset

Short selling works when the trader borrows from the broker to buy the underlying asset without paying its actual amount. In CFD, you don’t own the asset, thus, giving you the advantage of not paying the stamp duty. But since you borrowed from the broker, you will also have to pay the lender’s fee. So when you close your trade, you will also be buying the asset again at a new price then return the amount you borrowed to your lender. This situation will only be advantageous on your part if your predictions go according to your plan. But if it doesn’t, then you will be forced to buy back the asset at a higher price. This makes you pay more than the amount you invested.

Traditionally, there are a couple of limitations when short-selling. For example, since you are not the owner of the underlying asset, you will need somebody to lend the asset to you. This should mean that you cannot borrow all the stocks that you like, but only those stocks which are offered by the lender. This leads to issues of unborrowable stock.

But with CFD, you can execute any trade that you want since they don’t require any forms of exchange on the underlying asset. There is a contract between the trader and the CFD provider that states that you are agreeing to this exchange of price on the asset that you chose from the moment you open the position until it is closed. Short-selling in CFD means that you are ‘selling’ the asset.

Why Should You Short-Sell?

The greatest benefit of short-selling is the broader trading opportunities that you can have. Other popular reasons for short-selling are hedging and speculation.

When you short-sell, you are given a brand new dimension to speculate on market movements since traders can still make money even though the underlying asset will drop from its original price. You can also use short-selling when hedging. With the use of hedging, you have a shield against losses.

Just as there are advantages, short selling in CFD trading also has its own disadvantages. When you short-sell, you get a higher exposure to losses just like you get more exposure to profits. Plus, you need to pick the right CFD provider to deal with or you will have to suffer some counterparty risks.