Shorting and the Importance of Timing

Contracts for Differences Questions and Answers: Come and ask our top experts your CFD Trading queries. Quiz them about short selling and learn from their extensive experience

Q:Can you sell a contract for difference?

A: Absolutely. If you buy (go long) a CFD, you will make a profit if the value of the CFD increases. You can also sell (go short) a CFD and you will make a profit if the value of the CFD decreases. In this way CFDs provide a convenient and easy way to profit from a bearish view on a share.

Q:So does the broker pay me money on my position if I go short of an asset instead of long?

A: Yes. However, you don’t get the same rate that you’d pay the broker if you were long. So, while a broker might charge you Libor (the London inter-bank offered rate) plus 2.5 per cent on the value of your long position, he’d typically pay you Libor minus 2.5 per cent on a short position.

When you are long, you can also reduce your financing charges by keeping funds equivalent to funds that the broker doesn’t require as margin in an interest-bearing account. So, if the broker asks you for 10 per cent of your position as margin, you put the remaining 90 per cent of the total position’s value in a savings account.

Finally, you may be able to earn some interest on unused funds that you hold with the broker. Typically, you might hold a cash reserve in your account with them to take advantage of any opportunities that may arise. For substantial amounts, a broker might pay you some interest on funds held. However, this will not be automatic and you will have therefore to negotiate terms in advance.

Q:How important is timing?

I actually went live with the trade back in early Feb but timing this trade is not really that critical since I do not expect Intel’s numbers to be very pretty for the next few quarters.

A: Timing may not be critical but it will make a big difference to eventual profits (or losses). Getting in too early will mean that losses will be incurred in the early days of the trade which have to be recovered later. In my experience, the market often continues with silly ratings for far longer than you’d expect. Frequently a change has to be obvious to a 5 year old before the market changes its mind. That can seriously damage your profits.