Short selling, short selling, or simply “short selling” is a trading method of initiating a trade in a sell order in anticipation of a downward market movement. While short selling is a common practice for experienced traders, there are some significant hurdles for novice traders to face when shorting certain assets. One of the most obvious advantages of trading futures is the ease with which traders of all levels can short their favorite markets.
Learn more about the simplicity of shorting futures in this short video:
What is shortening?
The easiest way to understand shorting is the old adage – “buy low; sell high “. If you reverse that statement to “sell high; buy low ”is how you describe short sales. Speculation about a downtrend in the market leads traders to want to sell a financial instrument at a high time in order to later buy it back at a lower price for a profit. While this can be an uncomfortable concept at first for new traders, it is pretty commonplace. In simple terms, short sellers benefit when markets move down. Many traders will take both long and short trades as part of their overall strategy. You can instantly see how trading both the long and short sides of a market under different conditions can double your trading opportunities.
Restrictions on shorting stocks of stocks
Another reason new traders may not be familiar with the concept of short selling is because of the limitations and restrictions associated with short selling on the exchange. To sell stocks short, you need a so-called margin account. A margin account essentially allows you to borrow for your short trades and cover possible losses. It also invokes the Pattern Day Trader Rule which requires stock traders to hold a minimum balance of $ 25,000 when making more than 4 roundtrip trades per week. But no fear! Futures markets aren’t that complicated.
Advantages and Ease of Shorting Futures
You can trade long or short as much as you want in futures, provided you meet the margin requirements for the contract you are trading. For products like the Micro E-mini Index Futures, this means new traders with modest account balances can start short selling. When you “short” a futures contract, you are buying a contract to sell at a (preferably) lower price in the future. In contrast to the stock exchange, no borrowing is necessary. You can see how this also helps create a more balanced playing field between long and short traders as the financial requirements for long or short positions are the same for all traders.
Additional benefits of shorting futures
While the advantage of shorting futures over stocks is immediately apparent, a few additional factors make shorting futures clear and easy. First, CME Group’s futures trading centralizes activities on an exchange, while stocks trading takes place on dozens of exchanges. With futures, you have a clear picture of what all market participants are up to.
A central marketplace also ensures larger, consolidated pools of liquidity. The consistently high liquidity in the most common futures markets makes it easier to get in and out, as market participants are always available on both sides of the market. Stock size can fluctuate widely from day to day and it is not uncommon for stock traders to have difficulty getting in or out of a trade.
Futures are also used for hedging, which means that futures investors are trading multiple markets at the same time. Commodity futures are typically traded both to hedge equity index exposure risks and to diversify portfolios.
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