What can you do to benefit when stock markets are falling? There are two choices: buy something that rises when other markets are falling or go short the falling market.
Using CFDs to ‘Go Short’
Sometimes when markets are falling, there is just nothing worth buying. An old saying in trading goes “Don’t try to catch a falling knife.” It means stocks that are falling fast can quickly fall below your order to buy.
“Don’t try to catch a falling knife”
Traditionally in the stock market, investors will buy stocks and only make a profit when shares go up, this is known as taking a long position. A benefit of trading CFDs is that they allow you to speculate on both rising and falling markets.
Traders can take a short (sell) position. This provides additional trading opportunities because you can profit both from buying (going long) and from selling financial instruments.
What are the risks?
It’s important to understand that when you buy an investment (go long) the worst thing that can happen is the investment goes to zero – becomes worthless. When you sell something (go short) the value of the investment can in theory go up infinitely, meaning your potential losses are infinite.
It is for this reason that going short should only be done with sound money management techniques including a pre-defined exit strategy.
