How to short sell stocks? How to make money when stock prices decline? These five key points will help you master the secrets of short selling.

Question

Many novice investors entering the stock market only know that stocks can profit when they rise and lose money when they fall. But in reality, there are indeed people who have made a lot of money from significant stock declines—this is achieved through short selling operations. Whether it’s stocks, forex, commodities, or any financial product, profits can be made during declines by employing short strategies. Traders can utilize tools such as CFDs, securities lending, futures, options, and more to short.

However, it’s important to note that timing is critical in short selling, and most short sellers in the market are actually hedging rather than purely seeking profit. While shorting can generate considerable returns in a short period, the risks also increase accordingly.

This article will provide a detailed complete guide to stock short selling from five aspects: including the basic principles of shorting, qualification requirements, methods for selecting stocks, practical techniques, and risk management points.

1. Understanding the Basic Principles of Stock Short Selling

Short selling (also called shorting, going short, or selling short) is fundamentally simple: profit from stock price declines.

The specific process is as follows: a trader predicts that a particular stock will perform poorly in the future and that its price will fall. They sell the stock (short) first, and then buy it back (cover) after the price drops, pocketing the difference. This is the logic of a short position—sell first, buy later—opposite to the traditional buy-low-sell-high (long) approach.

Since short sellers initially do not hold the stock, they need to borrow the stock from a broker. This process is called securities lending. The trader borrows the stock from the broker, sells it, and when the price drops, buys it back to close the position, earning the price difference.

Many day traders, short-term investors, or hedging funds operate this way—they target hot stocks that are prone to skyrocketing, short them, and then close the position after the price drops for profit.

It’s important to clarify that not all countries permit short selling. For example, the Chinese market completely bans shorting. Taiwan, while relatively open, has restrictions related to liquidity and financial instruments, limiting shorting opportunities. For more convenient short trading, consider using futures or CFDs and other derivatives.

Example of a short operation

Using precious metal gold (XAUUSD) as an example: a trader shorts at $2000, and later gold breaks down, dropping to $1873. They close the position to take profit, earning the $127 difference. If the position size is large, profits multiply.

Whether in stocks, futures, or forex, as long as the trading framework is complete, there is a mechanism for shorting.

For example, with the well-known US e-commerce company Shopify, traders only need to observe the trend calmly and find suitable entry points to profit.

But it must be emphasized: short selling is an extremely high-risk investment strategy. As a short seller, you do not own these stocks; your goal is to sell at a high point and buy back at a lower price to profit. But if the stock price moves upward in the opposite direction, losses can be very severe.

2. Qualifications and Conditions Needed to Participate in Short Selling

Securities lending and shorting in Taiwan’s stock market—requires opening a margin trading account

Stock investment accounts are mainly divided into two types:

◆ Cash Trading: Trading at real-time market prices without leverage. For example, to buy 1,000 shares at $10 each, you need $10,000. After closing the position, deduct commissions, and the remaining profit is yours.

◆ Margin Trading: Allows borrowing money or stocks from the broker to trade, requiring a certain percentage of margin deposit. This is the necessary way to perform securities lending and shorting.

To apply for a margin trading account, the following conditions must be met:

Be a natural person aged 20 or above
Hold ROC (Taiwan) tax resident status
Have had the account open for at least three months
Have executed at least 10 trades in the past year

Note: Specific conditions may vary slightly among brokers; inquire directly.

When using margin trading for securities lending and shorting, if the stock price falls, you profit; if it rises, you need to buy back at a higher price to return to the broker. Since the stock price can go down to zero but has no upper limit, margin short selling is a “risk without limit, profit limited” mode. Also, borrowing stocks depends on available sources, so it’s recommended to consider opening a futures account instead.

Futures accounts inherently have leverage, allowing both long and short operations. But they have expiration dates, and long-term shorting requires frequent rollover, increasing costs. Not all stocks have corresponding futures, and liquidity risk must be considered.

Many traders choose to operate in overseas markets because they are relatively freer and offer richer financial instruments. Among these, CFDs are a good choice for shorting—they support both long and short, adjustable leverage, no expiration date, and are more flexible than futures.

Opening a CFD account for shorting

CFD accounts are easier to open, usually requiring only basic information like ID and bank card, with online application.

Typical requirements for opening a CFD account include:

Be at least 18 years old
Pass suitability assessment and identity verification (KYC)

Many legitimate CFD platforms have low minimum deposits, support multiple payment methods, and offer free demo accounts for practice. The account opening process is simple and quick.

3. Key Considerations When Choosing a Broker Platform

When selecting a trading platform, Taiwanese investors usually prefer opening accounts with local financial institutions because they are under strict supervision by the Financial Supervisory Commission, ensuring fund safety. Foreign platforms, while offering richer tools, also carry risks.

Key factors to consider include:

◆ Platform safety and compliance

Most importantly, verify whether the platform is officially regulated and authorized by the country where it is registered. Some platforms attract investors with promotions or bonuses but may run off with investor funds after accumulating a certain scale, causing heavy losses. Always choose reputable platforms with large scale, proper regulation, and numerous awards.

◆ Trading costs, product variety, convenience, and platform features

After confirming safety, compare trading fees, commissions, product types, trading hours, etc. Some platforms only support stocks or ETFs and have limited trading hours, greatly reducing trading opportunities. Platforms with comprehensive features, tools, and low costs are more suitable for long-term trading.

4. Stock Shorting Selection Strategies

First, identify markets with negative catalysts

Shorting relies on stock price declines, which require negative fundamentals to support the downward movement. Factors like slowing economic growth, tightening policies, or industry recession can push prices down.

Before choosing specific stocks, assess whether the industry or market is in a downward cycle. It’s also recommended to prioritize US stocks because of better liquidity, more mature markets, and richer derivatives, which support short strategies more effectively.

Assess whether a stock has shorting value

Determine if a stock’s current price is significantly above its intrinsic value by analyzing:

◆ Short-term price surges—Market hype or irrational behavior causes rapid price increases inconsistent with fundamentals.

◆ Deteriorating fundamentals—Declining revenue, shrinking net profit, major negative news like change of control, indicating downward pressure.

◆ Technical signals—Price hitting short-term resistance, overbought indicators, suggesting potential correction.

Find specific shorting opportunities

◆ Continuous revenue decline: If a company’s total revenue drops YoY or turns negative, it indicates institutional selling pressure, pushing the stock down.

◆ Monitor large capital movements: Stocks showing persistent overbought signals over several days should raise caution—they may face a correction.

◆ Overvalued industry: When an industry has experienced large gains and P/E ratios are high, it may be nearing a top.

When shorting, look for weak stocks at relatively high or resistance zones—probability of upward movement is low, downward is high, with large profit potential and limited risk. Conversely, shorting at low levels yields minimal profit and high risk.

The common saying “limited profit, unlimited risk” applies here—if the stock keeps rising and you don’t set a stop-loss, your losses can be endless.

Therefore, only participate in shorting when the stock truly has shorting value and enough downside space. Considering normal price fluctuations, transaction costs, and fees, profits often do not cover costs.

Other financial products like forex and commodities follow the same logic. For example, JPY/USD has been declining since 2021, showing a clear long-term trend and shorting value. But as Japan ends negative interest rates and the US begins rate cuts, continuing to short the yen loses fundamental support.

5. Practical Techniques and Risk Management in Short Selling

Entering at relatively high levels

Here, “high” does not mean the stock is continuously rising, but that the current price is relatively high compared to future potential.

For example, a shipping company’s stock surges unreasonably due to short-term hype, but the industry faces long-term declining freight rates. Shorting at this point is appropriate. But if the company’s profits are rising steadily and the stock price aligns with fundamentals, shorting is counter-trend and prone to being trapped.

From a trading perspective, after selecting a target, wait until the stock reaches a relatively high point—such as previous highs or key resistance levels—in a clear bearish trend before entering.

Take US Steel (NYSE:X) as an example: due to slowing US economic growth, steel demand plummeted, and profits shrank year after year. The stock price from the high of $47.64 in February 2018 fell sharply, reaching a low of $4.54 in March 2021—a decline of over 90%. In such a clear bearish trend, entering short at high levels has a high probability of profit.

Prioritize short-term trading

Short selling is often suitable for short-term operations, especially intraday—completing trades within hours or minutes, avoiding overnight risk and large rebounds.

Always set stop-loss points

Short selling is high-risk; always set stop-loss orders when opening a short position to ensure losses are within acceptable limits.

Prudent capital allocation

Opportunities to short are rare, and trades are few. When a high-probability opportunity appears, allocate appropriate capital to withstand potential reversals. Instead of spreading funds thinly or building positions gradually, focus on high-probability setups.

Core Reminders for Short Selling

The stock market is risky. Whether going long or short, making money requires clear trading logic and risk management systems. In the absence of confidence, avoid participating in short selling lightly.

You can never earn more than what you understand. Only by protecting your principal and progressing steadily can long-term profits be achieved. Although shorting can be tempting, always prioritize risk management.