What is short selling? Today I want to share a trading strategy that many experienced traders often use but newbies tend to overlook.

It's simple: short selling is a way to profit when the asset price is falling. Instead of buying and waiting for the price to go up, you do the opposite — borrow the asset, sell it, and wait for the price to drop so you can buy it back at a lower price. The difference is your profit.

The mechanism isn't very complicated either. The first step is borrowing securities from a broker. The second step is selling those securities on the market. The third step is waiting for the price to decrease and then buying back. Finally, you return the asset to the lender and profit from the price difference. That’s the entire process.

Let me give a real example. Company A's stock is trading at $50, but you have a feeling the price will fall. You borrow 100 shares from the broker and sell them at $50 per share (total $5,000). Next week, the price actually drops to $30. You buy back 100 shares at $30 each (total $3,000). The result is a $2,000 profit (not including transaction fees). But if the price rises instead of falling, you will incur a loss.

An important point is that in Vietnam, direct short selling of stocks is not yet permitted. However, you can implement this strategy through derivative products like CFDs (Contracts for Difference). CFDs allow you to trade both long and short positions without owning the actual asset.

For example, with the S&P 500 index. If you predict the index will decrease in the next 15 minutes, you open a short position of 1 lot with a 5% margin. With the current price at $1,777.10, the required amount is about $88.86. If after 15 minutes the price drops to $1,690, you close the position and make about $87.1 — which is 98% profit on your initial capital. This shows why many traders find short selling attractive.

But there are also significant risks. The advantage is that you can profit even when the market declines, and the potential profit can be very large with a small capital. The downside is that the risk is unlimited — prices can rise indefinitely, while the maximum profit is only 100% (if the asset price drops to zero). Additionally, you have to pay interest on borrowed funds and face the risk of margin calls.

The purpose of short selling varies. Some traders use it for quick speculative profits, while others use it for hedging. For speculation, you accept high risk to achieve short-term gains. For hedging, the goal is to protect profits or minimize losses during market volatility.

Another issue is timing. Even if you predict the trend correctly, choosing the wrong moment can still lead to losses because prices may take time to decline. During this waiting period, you have to pay daily interest.

Legendary investor Warren Buffett once said that short selling is necessary. Short sellers can "detect" problematic companies in the market. However, he also advises that not everyone should short sell.

In summary, short selling is a powerful tool but also very risky. It’s suitable only for traders with deep knowledge, extensive experience, and good risk management skills. If you're a beginner, it’s best to focus on long positions — buying low, selling high — before trying more advanced strategies.