Going short is opening a “short” or sell position to benefit from a fall in the market price of a share you do not own. This enables you to benefit from a fall in market price by selling the share or instrument with the intention of buying it back at a lower price.
CFD Example – Going short and making a profit
Amy believes Qantas Airlines (QAN) will release lower than expected profit figures and she expects the share price to drop in response. Amy places a sell order for 10,000 QAN shares at the current market price of $2.50. The margin rate on QAN is 10% so $2,500 is required as margin to open the position.
When opening a short position you have received a cash payment for the full value of your short position and receive interest on this amount at the RBA rate minus 2.5% pa. The overnight interest rate is calculated by dividing the per annum applicable interest rate payable by 365 (Days per year).
The table below shows the outcome of the trade assuming that the price of QAN falls by 10 cents to $2.40 the following day. A 10 cent fall will result in a trading profit of $1,000 which represents a 37.37% return on Investment inclusive of transaction costs.
"Going Short" $25,000 exposure to QAN |
Price | $2.50 |
CFDs sold for $23,750 exposure | 10,000 |
Total Exposure | $25,000.00 |
Commission (0.10%) | $25.00 |
Margin Requirement (10%) | $2,500 |
Total Outlay | $2,525.00 |
"Closing - Buying" $24,000 exposure to QAN |
Price | $2.40 |
CFDs bought to close position | 10,000 |
Position closed | $24,000.00 |
Commission | $24.00 |
Financing Received at 1.75% pa (RBA - 2.5%)/ 365 | $1.20 |
| $2,547.80 |
| Profit from trade | $1,000.00 |
Net Profit (Profit interest received - commission) | $952.20 |
Return on Investment | 37.37% |
Note: If the share price of QAN had risen by $0.10, Amy would have incurred a loss of $1,047.80.