Going Short with CFDs
The widespread pessimism associated with a bear market need not unduly concern the CFD trader. By taking a short position on a stock, you may have the opportunity to make a profit even while the market is falling.
Unlike conventional share trading, a CFD gives you a quick and simple way to capitalise on such downward trends in stocks. It is January and Singapore Press Holdings is quoted in the market at $4.60/4.61. You feel the prospects for the stock are poor and decide to sell 10,000 shares as a CFD at $4.60, the bid price.
To open your position you supply a deposit of 10% of the full value of the shares ($4.60 x 10,000) which equals $4600.
Suppose that by the time you close your position in early February the price has fallen to $4.28/4.29. Your gross profit on the trade would be $4.60 (the opening bid price) minus $4.29 (the closing offer price) = $0.31 x 10,000 shares = $3100.
To calculate your overall result on the transaction you would also have to take into account the 0.2% commission paid on your opening and closing trades, any interest and dividend adjustments made while your position is open and any share borrowing charges that may apply to your position. For a short position interest is paid to your account (after deducting any borrowing charges if applicable) while dividends are debited, to mirror the effect of actually selling the shares.
Of course, if Singapore Press Holdings surprised you by rising in the market, the same position could turn an equal or greater loss.
Risk management
To limit your risk you might like to consider placing a Guaranteed Stop on your position. With Guaranteed Stops, you specify a level at which you want your position to be closed, should the market move against you. We then guarantee that your position would be closed at this level, even if the price gaps suddenly.
For a detailed example of a short trade, visit our Example: Selling SingTel.
For more information on Guaranteed Stops, see our Risk Management pages.
The above comments do not constitute investment advice and IG Markets accepts no responsibility for any use that may be made of them.
08/02/08