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Case study

Jim has done well trading shares and CFDs in the past. He does get frustrated when the market falls and often sits on the sideline waiting for the market to go up. He has heard of short selling but isn't sure where to begin.

Short selling or 'going short' allows you to benefit from a falling share price. With CFDs, you are able to short sell more easily than other financial products as there are fewer restrictions, for example, lower margin requirements and no minimum order sizes.

Looking at the price chart Jim notices that the share price of MBL has just broken a key support level. In order to take advantage of this he does the following:

Protecting a share holding
Another use for short selling is a hedge for a share position. Short selling is generally more attractive than selling the shares themselves because the share holding is kept intact which may avoid potential capital gains tax implications.

Risk

This strategy has the potential for unlimited loss, if the price of the share CFD goes up. This can be limited with a stop loss order which can be moved or a GSLO (Guaranteed Stop Loss Order) which attracts a premium of 0.3% and cannot be moved.

Advantages over Short Selling Shares

Short selling CFDs has a number of advantages over short selling shares including:

* Interest paid at 4.5% p.a on the end of day value of the short CFD
* No up tick rule (Share CFDs can be sold as the price falls without the need for the stock to "tick up" before it can be sold short)
* No requirement for the broker to be able to borrow the stock

Summary:

With financial markets becoming increasingly integrated, sell offs in one part of the world can have a flow on effect in another. Short selling with CFDs is as easy as buying and is an important strategy for all to consider.

More about CMC Markets CMC Markets is a pioneer of CFD trading in Australia. Our goal is to empower Australian traders by giving you access to CFDs over Australian and global markets and the ability to trade on leverage and potentially profit in almost any market condition. We run regular CFD introduction seminars and education courses around Australia for traders new to CFDs and are committed to providing a cost effective CFD trading service. Click here for more info or to start trading CFD's.