Short Selling CFDs or Contracts for Difference can provide some fast gains but it can also lead to some pretty unattractive results if you are not careful. Today we’re going to have a look at whether or not the uptick rule applies to short selling CFDs.
What exactly is short selling?
Short selling is where you are looking to profit from a fall in the price of the stock or commodity that you are trading. It requires that you sell the stock first before buying it back to close the position. To many new traders this is a very foreign subject and one that some people really struggle to get their head around. The good news is that it is actually very easy to short sell and Contracts for Difference have made the whole process that much easier.
What is the uptick rule?
Prior to CFDs launching around the world, traders who wanted to short sell a stock had to do that with a full service broker and the uptick rule did apply. The uptick rule simply means that to initiate a short sell position the stock has to rise before you can enter your position. So if the market was continuously falling without going back up (even 1 cent) then you would miss out on the trade. The mindset behind this is you shouldn’t be able to make a stock free fall even more, hence the uptick rule.
Trading CFDs has made the whole process that much easier. You don’t have to wait for an uptick and you can sell a stock that is rapidly falling in value, which makes it much easier to profit from.
For those who are struggling to get their head around short selling try to think of it as the exact opposite of going long. Normally you would buy a stock at $1 with the hope that it will go to $2. With short selling you are trying to sell it at $2 with the hope that it will go to $1. Your profit is simply the difference between the 2 points.