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How to decide whether to buy or sell?

Beginner Course 4

Did you know that you are able to benefit from the price of the asset decreasing in value? One of the advantages of trading CFDs is that the asset can speculate the price of an asset will decline. Whereas, with the underlying (real) asset, the investor can only benefit from the price increases in value. 

Sell Trades and Shorting

When trading CFDs, “sell” means you believe the price will decline and buy means you believe the price will increase. Remember that you are not buying the real asset when trading CFDs. 

So why would a trader want the option to speculate a decline? Assets in the financial trading market are volatile because millions of traders buy and sell each minute. The activity between buyers and sellers causes the price to go up ordown. So even when an asset is experiencing an upward trend, there are still times the price may temporarily decline. Therefore, being able to trade in both directions is a huge benefit. 

Also, it is important to note that assets will always experience a downtrend at some point in time. For example, most economic theories advise that the stock market will have a major crash every 3-7 years. For example, between 2018 and 2023, the stock market experienced 3 crashes. This provides opportunities for experienced traders to speculate on the price decline. 

Why a trader May Short?

Traders can “short” or “sell” all different types of assets, but individuals must know how to identify when the price is likely to decline. For example,  the decline may be due to one of the following reasons:

1. Overbought - Trading above its value

2. Low Investor Sentiment - Low Investor sentiment causes a lack of demand, and some shareholders decide to sell their shares.

3. High-Interest Rates - causes lower economic growth and more expensive debt

4. Poor company earnings - poor company earnings mean fewer dividends for shareholders. 

Complete the “How to decide whether to buy or sell?” course in only 5 minutes. Expand your knowledge and test your knowledge!

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Derivatives are complex instruments and come with a high risk of losing money due to leverage. You should consider whether you understand how derivatives work and whether you can afford to take the risk of losing your money

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