Can you make money by short selling stocks? An article explaining the logic of "sell first, buy later" short selling and five key practical tips

Short Selling Means Profiting from a Decline

Many newcomers to the stock market have a misconception, believing that stocks can only make money when they go up, and that falling means losing money. In reality, you can profit from a decline by reversing your operations, which is known as “short selling” or “shorting.”

Simply put, the core logic of short selling is to sell first and buy later — sell stocks you don’t own at a high point, then buy back when the price drops, and the difference is your profit. This method isn’t limited to stocks; forex, commodities, precious metals, and other financial products also support short selling.

For example: Shorting gold at $2000, then closing the position when it drops to $1873, yields a profit of $127. If the position size is large, the profit multiplies.

What Conditions Are Needed for Short Selling? Comparing Two Approaches

Traditional Stock Margin Short Selling

In Taiwan, margin short selling requires opening a stock credit account. Conditions include:

• Being a natural person over 20 years old
• Holding ROC tax residency
• Having an account open for at least 3 months
• Making at least 10 trades in the past year

Through margin trading, you can borrow stocks from the broker to sell, then buy back when the price drops and return the stocks. However, this method has a critical weakness — unlimited risk, limited reward. Since stock prices can go down to zero but have no upper limit, if you misjudge the direction and get caught in a short squeeze, losses can be infinite. Also, borrowing stocks isn’t always available, limiting operations.

Contract for Difference (CFD) Short Selling — A More Flexible Choice

Compared to margin trading, using CFDs for buy-low-sell-high operations is much more flexible:

• Low account opening threshold (only 18+, verified via KYC)
• Low minimum deposit (some platforms as low as $50)
• Leverage up to 200:1, adjustable at will
• Both long and short positions possible, with no expiration date
• Wide range of trading instruments (US stocks, forex, commodities, cryptocurrencies, etc.)

On CFD platforms, you simply select “sell,” set leverage, stop-loss, take-profit, and other conditions, then place a short order easily. For investors wanting to short across global markets, this is indeed more convenient than traditional margin trading.

When Should You Short? Five Tips for Stock Selection

Step 1: Choose markets with clear negative catalysts

Shorting requires a reason for decline. For example, an upcoming rate cut by the central bank may lead to currency depreciation, or major negative policy news. I recommend prioritizing US stocks — high liquidity, rich trading tools, and high flexibility.

Step 2: Find stocks that are seriously overvalued

Short-term hype, significant drops in company performance, changes in major shareholders, etc., are negative signals. Pay special attention to:

• Companies with revenue significantly declining or turning negative compared to last year — indicating institutional selling and likely price drops
• Stocks that have been overbought for several days — prone to correction
• Industries with large gains and high P/E ratios — signals of a market top

Step 3: Short at relatively high points, not low

This is crucial. A relatively high point means the stock has more room to fall and less room to rise, limiting risk and increasing profit potential. Conversely, shorting at a low point is less likely, but if a rebound occurs, it can lead to huge losses.

Step 4: Ensure sufficient downside space

Don’t risk large amounts for small gains. Only target stocks with clear downward potential and enough shorting value. Otherwise, after factoring in costs and fees, profits may not be worthwhile.

Step 5: Use technical signals as reference

When the stock price reaches previous highs or key resistance levels, it’s a good time to short. Especially in a clear downtrend, entering at relatively high levels and patiently waiting for the market to reward you is a sound strategy.

Three Principles of Short Selling

Short-term Operation

Short selling is generally a short-term activity. Day trading or intraday shorting can be completed within hours or minutes, closing the position the same day. The benefit is quick profit and avoiding overnight risk of a rebound.

Set Stop-Losses

Short selling carries high risk. Always set a stop-loss when opening a short position to keep potential losses within manageable limits. Operating without a stop-loss is like gambling.

Rational Money Management

Opportunities for shorting are rare and not suitable for diversification. Once you identify a high-probability setup, allocate your capital wisely to withstand potential reversals. Better to miss a trade than to blindly bet and suffer large losses.

Practical Case: Shorting US Steel(X)

Take US Steel as an example. Since 2018, the US economy has slowed, and steel demand has plummeted. Based on this fundamental analysis, shorting the stock was rational. US Steel’s stock fell from a high of $47.64 to a historic low of $4.54 in March 2021 — a decline of over 90%.

In such a clear downtrend, simply entering at a relatively high point for shorting offers a high probability of profit. This exemplifies the classic case of understanding “when to short.”

Choosing a Safe Trading Platform Is Critical

Whether opting for margin trading or CFDs, platform security is paramount. Focus on:

• Regulation by local authorities (e.g., ASIC in Australia, FCA in the UK)
• Transparent trading costs (zero commissions, low spreads preferred)
• Rich trading instruments (more options mean more opportunities)
• Platform stability (fast execution, 24/7 support)

Some unregulated platforms lure investors with high leverage and high rebates, only to run away with the funds. Choose large, award-winning, regulated platforms to ensure your funds are protected.

Final Risk Warning on Short Selling

Finally, it must be emphasized: profits from short selling are limited, but risks are unlimited.

The reason is simple — stock prices can fall to zero, capping your gains, but they can rise infinitely. If you don’t set a stop-loss, losses can be endless. This is why most short sellers are not primarily aiming for profits but for hedging.

For ordinary investors, a clear trading logic is essential. Without confidence, avoid impulsive buy-low-sell-high operations. After all, the money you make in the stock market is always within your own understanding. Protecting your principal and operating steadily is the key to long-term profitability.