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You might have heard the term ‘shorting’ a stock, a strategy that allows traders to potentially profit when the price of an asset falls. In a volatile stock market like 2025, where trade tensions and economic uncertainty continue to fuel market swings, short selling has become a popular (albeit risky) tool for traders seeking to take advantage of downward movements.
If you’ve searched the web but are still unsure how shorting works or where the opportunities lie, read on as we demystify this trading technique once and for all.
Key Points
- Short selling, or ‘shorting’, is a strategy where traders speculate on declining stock prices by borrowing and selling the asset first, then buying it back at a lower price.
- CFDs (Contracts for Difference) let you short assets without borrowing them physically, offering easier access but involving significant risk, including the potential for infinite losses.
- Short selling is used for both speculation and hedging, but it requires precise timing and robust risk management.
What is short selling?
Let’s begin with the desired outcome of short selling—to potentially profit when an asset’s price drops—and then explore how it’s achieved.
In a typical (or ‘long’) trade, you buy a stock at a lower price and hope to sell it later when the price goes up—and hence the popular term “buy low, sell high”.
Short selling, on the other hand, works in reverse: You sell first and aim to buy back at a lower price. This strategy is typically used when you believe a stock is overvalued or likely to decline due to negative news, weak earnings, or broader economic pressure.
Here’s how it works:
- Borrowing the asset: A short-seller borrows shares of a stock from a broker—typically stocks they believe will decrease in value.
- Selling the asset at the current price: Those borrowed shares are then sold on the open market at the current price.
- Repurchasing at a lower price (ideally): If the stock price falls as speculated, the trader buys the shares back at a lower price, returns them to the broker and pockets the difference (minus any fees or interest charged for borrowing).
If the price rises instead of falling, however, the trader will be forced to buy back the stock at a higher price—realising a loss. Because there’s no limit to how high a stock price can rise, potential losses from short selling are theoretically unlimited.
It’s also important to note that for futures or CFDs, short positions can be entered into without having to actually borrow assets from other investors. Read more about CFDs vs stocks. If you’re considering trading, you may explore opening a live account with Vantage.
An example of how short selling works using CFDs
Imagine a stock is currently trading at $10. As a CFD trader, you believe the price would fall. Based on this bearish outlook, you decide to enter a short position by opening 1,000 SELL contracts at the current market price.
A week later, the stock price drops to $9. You close your trade by executing 1,000 BUY contracts, effectively buying the asset back at the lower price. As a result, your profit is $1,000 ($1 x 1,000 contracts), excluding transaction costs, borrow-rate costs, and other fees. (Please note that in real-world trading, these additional costs must be factored in to calculate your net return.)
CFD trading often involves margin accounts, where only a fraction of the trade value is required upfront. However, leverage amplifies both potential profits and potential losses. If the market moves against you, you may lose more than your initial deposit.
If the stock price unexpectedly rises instead of falling, you might face a margin call, requiring you to deposit additional funds to cover potential losses from your initial investment and maintain the position. Failure to meet a margin call might cause your position to automatically close at a loss.
In today’s volatile market conditions, risk management is more important than ever when trading on margin. Related article: Margin vs. Free Margin: Overview, Similarities & Differences
Why do traders short sell?
There are two main reasons traders choose to short sell:
1. Capitalise on downward price movements
While short selling can be used to potentially benefit from declining prices, but it primarily carries significant risk, especially in volatile or unpredictable market conditions, making effective risk management essential.
In 2025, short-selling strategies have been frequently used to capitalise on sharp pullbacks caused by trade policy shifts and inflation concerns. Shorting can be used to gain exposure to downward price movements, offering traders potential opportunities in both rising and falling markets, though with heightened risk.
Read more about bear markets to deepen your understanding of market cycles.
2. Hedging
Short selling can also serve as a hedging strategy.
If a trader observes that their current open ‘long’ positions have drifted from their desired risk parameters—due to market volatility or macroeconomic shocks—entering new short positions can help offset potential losses without closing current positions.
This is especially useful in uncertain environments where holding long-term investments makes sense, but short-term downside protection is needed.
Like all other trading instruments, shorting with CFDs comes with both opportunity and risk. When used responsibly, with proper risk management, position sizing, and timing, it can be a powerful addition to a trader’s toolkit.
Risks of short selling
In a conventional ‘long’ trade, your downside is limited—the most you could lose is the amount you invested (i.e., the price at which you bought the stock), should the stock’s value fall to zero. On the upside, your profit potential is theoretically unlimited, as there’s no cap on how high a stock’s price can go.
Short selling works in reverse. Your potential profit is limited—the best-case scenario is that the stock price drops to zero. However, your potential losses are theoretically unlimited because there’s no ceiling on how high the stock price can climb. If the market moves against you, a short position could result in losses that far exceed your initial investment.
Because of this asymmetric risk, it’s crucial to use a stop-loss order when short selling. Stop-losses help cap potential losses and protect you from losing your entire invested capital or more.
In short selling, timing is everything
Timing plays a critical role in short selling. Even if your broader market view is correct, intermittent price swings could trigger stop-losses or margin calls, potentially closing your position at a loss before the market turns in your favour.
This is especially so in the current market environment where price movements are sudden and severe. That’s why short sellers must not only predict price direction but also time their entries and exits with precision.
As with all forms of trading—but perhaps even more so for shorting—traders should trade responsibly. This includes understanding the markets, using the right trading tools, and implementing robust risk management protocols as part of your overall strategy.
You can open a live CFD trading account with Vantage to access both rising and falling markets. However, CFD trading carries a high risk of loss and may not be suitable for all investors—ensure you understand the risks and seek independent advice if needed.
