Many of the world’s stock markets have enjoyed incredible gains since 1982 and investors have been pocketing steady, consistent returns for over 2 decades now. During that time there have been a few rocky patches that may have unsettled the newbies but seasoned investors who held on have been doing very well.

So why would you want to short sell?

Given that stock markets around the world have generally been heading up and during some periods (2003 – 2008 or the tech boom) the stock market has experienced incredible bull market runs, one has to ask exactly why you would want to short sell.

Before we uncover the benefits of short selling we’ll discuss exactly what it is.

Short selling enables traders or investors to benefit from a fall in a stocks share price. Ideally your goal is to make a profit as the stock you are trading falls in value. Traditionally short selling has been reserved for the very experienced traders, but since the advent CFDs, short selling is now simple to understand and very easy to execute.

Short Selling example – Don’t laugh too much!

Imagine it’s raining outside and you need to get some lunch but you don’t have an umbrella. So you ask your workmate if you could borrow her umbrella and Krystal happily agrees. Once downstairs you are approached by a suave looking guy in an Armani suit holding a bunch of papers (probably a lawyer!) and he doesn’t have an umbrella. He asks if he can buy your umbrella.

Without a moments hesitation you say “Yes, you can have it for $30??? and he happily agrees.

Problem:

You have just sold something you don’t own and there is a chance Krystal (the original owner) is going to get upset.

Solution:

You run through the rain to the shops, head to the nearest umbrella shop (is there such a thing?) and you notice they are selling an identical umbrella to the one Krystal lent you. Even better news, it’s only $20.

So you hand over your $20 and discover that you have just made a $10 profit and Krystal would be none the wiser.