Why Short Sell With CFDs?

Phillip CFD Education | Short Selling

One of main reasons that CFD is a popular product is its ability to perform short selling. This gives investors the opportunity to make a profit when markets are falling. Some long-term investors use this feature as a hedging tool to protect their profits. They establish an opposite position to what they already have on stocks to prevent any losses due to short-term down trend in markets.

Short-Selling in CFD Trading – Example

Jasvind currently has a bearish view on Stock A. As he is not allowed to use normal stocks on the cash market to short-sell Stock A, he decides to use CFD. Stock A is currently trading at a price of $3.00. Jasvind SELLS 5,000 contracts at the Bid Price of $3.00.

A week later, the price of Stock A dropped to $2.50 and Jasvind decides to close his contracts. He BUYS 5,000 contracts of Stock A at the Ask Price of $2.50. The total profit Jasvind made from this trade is ($3.00 – $2.50) * 5,000 = $2,500.

example of leverage in cfd trading

However, if a week later the price of Stock A went up to $3.50 and Jasvind decides to close his contracts by buying 5,000 contracts of Stock A at the Ask Price of $3.50, he would have made a loss of ($3.00- $3.50) * 5,000 = $2,500.

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Shortselling with CFDs

It is evident that financial markets move in cycles. As the saying goes “What goes up, must come down”. Investors who spend time studying the price movement and cycles of the assets they intend to invest in could be rewarded with profits earned from uptrends and downtrends.

If you have never attempted short-selling before, maybe it is time to start as you are losing out on 50% of the opportunities in the market. Should you only stick to the traditional method of going “long”? Let us take a look at some reasons to short-sell!

What Assets can you Short with CFDs?

Stocks/Equities CFD

CFDs are commonly used by investors who want to short stocks. Most markets generally impose restrictions on short-selling for stocks – and it is inconvenient to initiate an equity short in the market.

For instance, an investor would have to inform their broker of their intention to short and procure shares, and subsequently inform the broker when they have bought back the shares to settle the short. CFDs circumvent all of these troublesome issues – all you need to do is to focus on what you want to long or short & initiate the trade.

We’ll settle the rest for you. Another benefit of trading Equity CFD with us is being able to long and short more than 5,000 contracts in one account. Spreads are not quoted in addition to prevailing market prices. For more information on our Equities CFD, kindly refer to the contract specification and pricing pages.

World Indices CFD

Indices are a great way to participate in the performance of an overall market if you do not want to go through the hassle of doing research on individual stocks. An extremely popular Index that many of our clients trade is the Straits Times Index SGD5 CFD (STI CFD). 

The Straits Times Index is a capitalisation-weighted stock market index that is commonly regarded as the benchmark index for the Singapore stock market. STI CFD can also be an ideal tool to battle the ongoing trade wars and it is a unique CFD product that we are proud to offer.

 World indices CFD are useful as they tend to react quickly to major economic news so traders can easily trade them. Additionally, from a diversification standpoint, indices are less risky than individual stocks which have unsystematic risk – this risk can be largely eliminated if you purchase an index. For more information on our World Indices CFD, kindly refer to the contract specification and pricing pages.

Commodities CFD

The commonly traded commodities are typically Gold, Silver and Oil. While most commodities are traded on futures, there are some benefits to trading commodities via CFDs. Unlike CFDs where you trade just on the price of the particular commodity, both parties on a futures contract must fulfil the conditions of the contract. If you are not familiar with the futures contract and choose physical settlement instead of cash based settlement, you might end up with a truckload of oil barrels at your door! For more information on our Commodities CFD, kindly refer to the contract specification and pricing pages.

Forex (FX) CFD

Forex (FX) is the largest & most liquid financial market in the world. The largest volume of trades comes from traders who trade the currency pairs. The FX market is open 24 hours a day, 5 days a week. Check out our newly launched FX CFDs where we offer very competitive spreads for some of the major currency pairs. To understand more about the basics of FX CFD trading, be sure to read our FX CFD article. Best of all? No commission and finance charges for opening your FX CFD positions with us! For more information on our FX CFD, kindly refer to the contract specification and pricing pages.

Basics to CFD Trading