Making Money in a Down Market - Shorting 101

What is Short Selling

Shorting or Short Selling is a wealth creation strategy that speculates on the decline of prices in the future. Institutions use shorting to INSURE assets that they do not wish to sell but wish to guarantee a current price. This is known as Hedging.

Hedging is where you take a short position to neutralize or partially neutralize the downside risk of exposure to the market.

In a market we can borrow a financial instrument at the current price with the guarantee that we will buy it back in the future at some point. This BORROWING requires funds to guarantee that we will buy it back in the future at some point. This guarantee is known as a MARGIN.
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We buy stocks for long-term income and the potential for capital gain.
The Buy equation when we acquire a stock is:

The Buy Equation

+1(Buy) -1(Sell) = 0 (Net Position P/L)

Buy 1000 BHP at $30 = $30000
Sell 1000 BHP at $33 = $33000
Hold 0 BHP with +$3000 P/L

We short stocks for Hedging to insure the current value against a lower future price whilst still retaining the income or for capital gain in a falling market. We then borrow the instrument with the guarantee that we will buy it back in the future at a time that is convenient to us.

The Short (Sell) Equation

-1(Sell) +1(Buy) = 0 (Net Position P/L)

Sell 1000 BHP at $30 = $30000
Buy 1000 BHP back at $27 = $27000
$30000 (sell) - $27000 (buy Back) = $3000
Hold 0 BHP with +$3000 P/L

There are several mechanisms to short including:
  • Exchange Shorting
  • Options
  • Futures
  • Contracts for Difference (CFD's)
Rather than go through complex strategies of each instrument to explain Short Selling, we will focus on CFD's. Investor Centre has an education program "Trading Tigers" that has established a shorting relationship with City Index using CFD's. All our shorting examples and methodologies will reference The Trading Tigers City Index AT Pro system.

To establish a Trading Tigers City Index Account - contact
Trishella Geitz on 1300 132 999 or email trish@Investorcentre.com.au

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