The other day I dropped into the Australian Securities Exchange in Sydney.
Unlike the New York Stock Exchange with its barricades and armed security, the Australian Securities Exchange is open to the public.
The people who visit are mostly old timers.
Old blokes who refuse to buy a computer.
They meet with their mates and watch stocks go up and down on the big price board.
It's a great place to have a whinge about your investments.
During my latest visit I heard two old fellas having a conversation.
"The damn stock market keeps going down" the crankier of the two complained.
He next said something which caught my attention.
"I'll have to wait for the market to go back up before I buy in again.
" Good gracious, I thought to myself.
What an old world mentality! Obviously grandpa only knows how to trade the old fashioned way...
Buy Low, Sell High Times have certainly changed.
Traders don't have to twiddle their thumbs in a bear market anymore.
Traders can now make money even if the market is going down.
And all of this is possible because of 3 lovely letters: C.
F.
D.
CFD stands for Contracts For Difference and they have revolutionised the way we trade.
One of the main reasons to trade CFD's are they allow us to short sell.
SHORT SELLING DEMYSTIFIED Grumpy grandpa only had one strategy at his disposal.
Buy Low, Sell High In CFD lingo to buy low and sell high is to trade "long" or from the "long side.
" CFD's however allow us to also trade "short" or from the "short side.
" Short selling allows us to make a profit from a falling security price.
When you short sell your goal is simply reversed.
Sell High, Buy Low Frankie, what the heck are you saying? How can you sell something you don't firstly own? Ok...
Back up there big fella...
Take a deep breath.
I've got some good news.
I'm not going to make this complicated.
I won't waste your time discussing what goes on behind the scenes when you short sell through your CFD provider.
They will gladly explain the mechanics to you.
My job is to explain how to put money in your pocket by short selling.
And there is no better time to make money than in a falling market! Let me help you by comparing a long versus a short strategy.
It'll make a lot of sense in a moment.
BULL MARKET - LONG STRATEGY Imagine the market going up.
Our strategy - buy low, sell high.
Let's say we believe ABC stock is set to explode.
We buy 2,000 units at $10.
00.
We are right and ABC rises to $10.
50.
What is our profit? $0.
50 X 2,000 units = $1,000.
BEAR MARKET - SHORT STRATEGY Imagine now the market is going down.
All the grandpas are sitting on the sidelines waiting for the market to come back up again.
Not us! We decide to short sell CFD's on stocks.
Our strategy - sell high, buy low.
Let's say we feel XYZ stock is set to tumble.
We sell 2,000 units at $10.
00 using CFD's.
We are right and XYZ price drops to $9.
50.
What is our profit? $0.
50 X 2000 units = $1,000.
What's the difference? Answer: There is no difference! In both examples the stock price moved $0.
50.
ABC went up $0.
50.
XYZ went down $0.
50.
The profit however on both trades is exactly identical...
$1,000.
By employing the right strategy we can make money regardless of price direction.
When markets tumble short selling helps us make money and it keeps us in business! Old timers don't know how to short sell.
They have turned their backs on an important trading strategy.
This limits their trading to bull markets only.
In a bear markets they have to sit on the sidelines and complain with their mates.
Look for them at the Australian Securities Exchange.
NB This article is for illustration purposes and therefore has not factored in brokerage and/or other CFD financing costs.