Profit when the Market Falls
Short selling has received a great deal of coverage in the media lately, especially in light of the recent financial crisis. Yet many people are still unfamiliar with the concept - the idea of selling an asset that you don’t actually own naturally seems rather odd.
CFD trading offers a flexible way to trade on the markets, no matter which direction they are heading. So how can you use short selling to profit when markets are falling?
Potential in declining markets
Many economic factors can cause a market to fall, and historically markets do not react well to uncertainty. Sterling has been struggling against the dollar, for example, and reacted negatively to the recent speculation of a hung parliament. On 1 March 2010, after opinion polls suggested that the UK was heading for a hung parliament, the pound dropped 2% against the dollar in one day. Investors showed their concern that the lack of a strong government could lead to problems dealing with the UK’s budget deficit, and the pound came under heavy selling pressure on the foreign exchanges.
Anyone who has picked up a newspaper lately will know that stocks can suffer in a similar way – evidenced by the recent controversy over Goldman Sachs’ legal battle. Despite a net profit of $3.4 billion (£2.2 billion) for the first quarter of this year, shares have fallen 17% over the past two weeks. This slide followed the Securities and Exchange Commission’s decision to investigate the bank for fraud.
As in the case of Goldman Sachs, bad news for shareholders can often be a good opportunity for short selling on the stock.
Learn how to short sell
By correctly identifying the factors that cause a market to fall, the CFD trader is perfectly positioned to capitalise when the decline occurs.
Markets can be traded in both directions: put simply, short selling is a way to position yourself to profit if you feel a market is going to fall. Unlike more traditional forms of investment, with CFD trading it’s just as easy to go short as it is to go long.
Our chief market strategist David Jones has recorded a free online seminar to show how to use your trading to get the most out of falling markets.
To find out more, watch the seminar now.
Take a position
If you have an opinion on the direction a particular market is likely to head, whether you think it will rise or fall, CFD trading offers a flexible, leveraged way to trade without having to pay stamp duty.
To help you keep up to date on the various factors that could affect the markets, we also display the key upcoming UK and US Economic Indicators on our website. This guide explains the importance of each indicator, as well analyst expectations and details of when the figures will be released.
Updated: 29/04/10
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