Pinpointing the right investment opportunity can be tricky and with the economy still in the doldrums fewer traders than ever are earning a decent return from stocks and shares. However, when the market is only rising sporadically, it is entirely possible to profit by spread betting on the downward movement instead. This is known as short selling or shorting.
Shorting is an option every trader should have in their repertoire and can also help to hedge against conventional bets or investments. It works in exactly the same way as spread betting on the price increasing, except that everything is reversed.
Making money when the price drops!
To start with it can seem a bit strange to be rooting for something to drop in value, but you will soon get used to cheering for your stock to drop. Conversely, if you opt to short an investment, you absolutely don’t want to see the price rise. This is a very peculiar notion for most investors!
To benefit from short selling it is important to identify a target that is at the top of its price range, or even better, over-priced. Although your investments may have done very well at dropping in value in the past (when you didn’t want them to), finding a suitable subject for shorting is more difficult than it sounds. Simply considering the price is a dangerous strategy because there are many more variants that affect the market.
Shorting tends to be a relatively rapid type of trading, with positions usually opened and closed on the same day. It is also important to be able to move quickly because prices can take a dip even if good news is released, only to spring back higher. Companies that you believe may be about to issue a profit warning are worth considering as are those that are struggling to pay off their debts.
Companies operating in tough competitive markets tend to be a good place to start looking, as well as those in the world of technology. Rival firms are always releasing products that make existing goods defunct.
Losing isn’t easy
Deciding to take a short position should never be a snap decision; it is necessary to conduct as much research and obtain background information in the same way as you would for betting on a stock to rise in value. Everything works in the same way; you simply have to invert the indicators.
Many people make the mistaken assumption that finding a market to go short on is simpler, but any losses can be substantial as there is no upper limit to how far the subject could rise. There can also be heavy swings and there tends to be greater volatility, all of which can sting the unprepared investor.
However, despite the risks associated with the practice, shorting undeniably offers a far wider range of opportunities, especially in a bear market or an economy that is struggling. There is nothing inherently ‘wrong’ about betting on a price dipping lower; markets are cyclical and there would be downward movements even if you did not place a bet.
Shorting on spread betting allows an investor to use their knowledge to profit from a market that is dropping in price in the same way as making money from one that is rising. Whichever way you opt to place your bet, it is essential to back your investment with solid research to give yourself the best chance of a good return.