When I trade stocks my strategy is simple.
Buy Low, Sell High
In a bull market I like to trade stocks. But what happens when markets fall?
When markets head south I may turn to CFDs.
CFD stands for Contracts For Difference and they have revolutionised trading. One of the main benefits of CFDs is they allow short selling.
SHORT SELLING DEMYSTIFIED
In CFD lingo, to buy low and sell high is to trade "long" or from the "long side."
CFD's however also allow the reverse to happen. They allow trading "short" or from the "short side." Short selling makes it possible to make a profit from a falling security price.
When you short sell your goal is completely reversed.
Sell High, Buy Low
Let’s now compare a "long" versus a "short" strategy.
LONG STRATEGY
Let’s say the market is going up. My strategy - buy low, sell high.
I find a stock that I believe is set to explode. We’ll call the fictitious stock ABC. I might buy 2,000 units of ABC at $10.00.
Pretend I’m right and the stock rises to $10.50.
What is my profit? $0.50 X 2,000 units = $1,000.
Nice.
SHORT STRATEGY
Imagine now the market is going down….BIG TIME!
I find a stock that I believe is heading south...plummeting to planet earth!
I decide to short sell CFD's on this fictitious stock. Let’s call the stock XYZ.
By short selling CFDs on the stock I use a reverse strategy.
Sell high, Buy low.
Let’s say I sell 2,000 units at $10.00 using CFD's.
XYZ drops to $9.50.
What is my profit? $0.50 X 2000 units = $1,000.
What's the difference?
Answer: There is no difference!
In both examples the stock price moved $0.50. ABC went up $0.50. XYZ went down $0.50.
The profit however on both trades was exactly identical...$1,000!
By employing the right strategy money can be made regardless of price direction.
In a bear market, CFDs give me the flexibility to short sell. This might form part of my trading strategy.
NB This article is for illustration purposes and therefore has not factored in brokerage and/or other CFD financing costs.