How can small savers short sell shares?
This guide will help you understand the possibilities of going short the market, shorting shares, indices, commodities and currencies using Contract for Differences (CFDs). Contracts for difference are popular products when the market crashes or there is high volatility because traders using CFDs can still profit if prices fall. Using the long or short option is betting on the values moving up or down. The difference in the long and short option is the potential loss or profit on the trade. Read on to find out more. Traders can bet on the price movements of: Indices (e.g. S&P500) Individual stocks Commodities (e.g. gold or oil) Currencies (Forex) Cryptocurrencies
What is a CFD?
A contract for difference (CFD) is a particular form of contract between you (payer) and your broker (seller) based on the price of a particular asset. When the contract is entered into, this price is called the ‘entry price’, while at the end of the contract it is called the ‘exit price’. If the exit price of a particular asset is higher than the entry price, the seller must pay the difference to the buyer: this is called the ‘long position’. If the exit price is lower, the buyer has to pay the difference to the seller: this is called a ‘short position’. This is why it is called a ‘contract for difference’. It is based on the prices and the buyer gets no right over the asset. Examples of assets could be stock indices, shares and commodities such as gold or oil. CFDs are normally bought on margin: each financial derivative has its own percentage. The margin can be identified as a deposit for the purchase of the specific asset. If you buy 100 shares at $5 each and the margin is 5%, you will pay $5 x 100 x 5% which equals $25. There is also the possibility of taking advantage of leverage.
The long position
The long position means that the trader expects the value of the security or asset in question to increase. For example, the stock of company XYZ is trading at $10 and an increase is expected. You have $10,000 and the initial margin is 10%, this is equivalent to buying 10,000 shares (calculated as follows: $10,000 / 10 = 1,000 shares divided by 10% = 10,000). Let’s assume that in two weeks the share price increases to $ 5.10. This means that you will have earned $1,000. Remember, this is the gross profit and you need to subtract the cost of the trade being open for two weeks and also the possible trading commissions payable. At the end of this calculation, you will get the net profit from the long position.
The short position when prices fall
When the short position is discussed, traders expect the value of the stock, index, commodity or currency in question to decrease. An example is if XYZ stock is trading at $10 and a decrease is expected. If the investment has $10,000 in funding and the margin is initially 10%, to make a profit you will need to sell the shares and then buy again later. You will sell 10,000 shares. Let’s assume that the share price drops to $9.75 in a couple of weeks, the share has thus fallen in value by. This time you will receive $ 2500 in profit. As mentioned in the previous case, this is the gross profit. This time you need to add the amount received for the two weeks when the position is open. The net profit is calculated as follows: gross profit plus interest minus trading commission.
What is the difference?
The difference between the long and short positions basically lies in the interest rate that has to be subtracted from the gross profit for the long position and added for the short position. Here you can see an example of how the long and short positions work:
| Go long | Go short | |
| Interest rate | 5% | 5% |
| Commission | 0.1% | 0.1% |
| Initial investment | $15,000 | $15,000 |
| Leverage (margin) | 10:1 (10%) | 10:1 (10%) |
| Value | $150,000 | $150,000 |
| Future value | $160,000 | $140,000 |
| Gross profit | $10,000 | $10,000 |
| Fees and charges | $310 | $290 |
| Interest to deduct (long) | $257 | – |
| Interest to add (short) | – | $235 |
| Net profit | $9,433 | $9,945 |
In this case, you may earn a higher profit from the short position due to the “interest rate factor”. Let’s assume that in both cases you incur a loss. In the long position, you have to add the interest rate, while in the short position you have to subtract the interest rate. In such cases, going long will minimize the loss, while going short will increase the loss. Using leverage can also increase your profits as much as your losses: it would be better to limit this financial tool if you are a beginner. As always, it is important to consider the risks
Small savers who don’t know how to short sell should think again
As the headline says Small savers who don’t know how to short sell should rethink, or learn how to short sell to make money even when the stock market goes down. Most people don’t know that you can short stocks, that you can make money in a down market. Learning how to do this greatly increases the number of trading opportunities. But who really knows that CFDs can be used to short sell, the easy way. We call it “modern short selling”, which is what CFDs do. The word CFD means “contract for difference” and is an instrument that licensed financial institutions and trading firms can set up.
What is the easiest way to short sell shares as a small saver?
Traditionally, you would have to call your bank or online broker and put up a large amount of money, usually a million dollars or more, to find someone willing to lend you their shares. But with modern short selling using CFDs, the rules of the game are different: you can short sell from a few hundred dollars per share!
US stocks with a lot of short selling
However, these stocks have shown a sharp rise, which has attracted the interest of many stock traders who believe that the price rise can continue indefinitely. These stocks are highly valued, with both traditional and modern short sellers taking large positions and shorting these stocks. It is also possible to ‘short the index’. Most CFD traders offer their clients the opportunity to short virtually all major stock market indices. It is also possible to short commodities. When it comes to currencies, short selling is almost always part of the business idea. You buy EUR and sell USD, or buy USD and sell JPY.
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Risk warning
CFDs are complex instruments and they carry a high level of risk due to leverage. 72.87% of all retail investors lose money when trading CFDs through this provider. You should consider whether you understand how CFDs work and whether you can afford to take such a high risk of losing your money.
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