Short selling stocks is not a guaranteed profit: Five key insights reveal the truth and risks of short selling strategies

I. Short Selling Is Not as Simple as It Seems

Many beginners entering the stock market often believe that stocks only make money when they go up and lose money when they go down. However, there are indeed traders who profit during market declines, and the underlying logic behind this phenomenon is short selling of stocks.

Short selling (also called shorting, going short, or selling short) has a straightforward core principle: predict that the stock price will fall, sell at a high point in advance, and then buy back after the price drops to earn the difference. But behind this seemingly simple logic lie many complex market mechanisms and risks.

Investors can perform short selling through various financial instruments, including margin loans, futures, options, Contracts for Difference (CFD), and more. However, it is especially important to emphasize: short selling is not a stable profit-making method; most short sellers aim for risk hedging rather than pure profit. While some people have accumulated wealth quickly through short selling, others have suffered heavy losses.

II. The Nature of Short Selling Risks: Unlimited Losses, Limited Gains

This is a core risk concept that all investors must understand.

When you go long on stocks, the maximum loss is the amount of capital invested. But short selling is entirely different—theoretically, stock prices can rise infinitely, which means your losses could keep expanding.

For example, suppose an investor shorts a stock at $50, expecting the price to fall. But if the company suddenly releases positive news, the stock price not only fails to decline but instead surges to $100, $200, or even higher. At this point, the short seller’s losses will multiply, and in theory, there is no upper limit to these losses.

In contrast, the profit potential from short selling is relatively limited. The stock price can only go down to zero, meaning the maximum profit is the difference between the entry price and zero. Therefore, short selling has always been a high-risk, high-difficulty trading strategy, suitable only for investors with deep market understanding and strong risk tolerance.

III. Conditions and Requirements for Opening Short Selling Permissions

Taiwan Stock Market: Margin Short Selling Requires Opening a Credit Account

In Taiwan, to perform margin short selling, you first need to open a stock credit account. Generally, investment accounts are divided into two types:

Cash Trading: Use your own funds to trade at real-time prices, with no leverage. For example, if an investor wants to buy 1,000 shares at $10, they need to prepare $10,000.

Credit Trading: Borrow money or stocks from the broker to trade, which involves margin. Margin financing and short selling fall into this category.

To open a credit account, the typical requirements are:

• Be a natural person over 20 years old
• Have tax residency in the Republic of China (Taiwan)
• Have held the account for more than three months
• Have completed at least 10 transactions in the past year

However, it’s important to note that Taiwan’s margin short selling has clear restrictions: if no stocks are available to borrow, you cannot operate, and losses can grow infinitely as the stock price continues to rise.

International Markets: CFDs Offer More Flexible Short Selling Tools

Compared to margin loans, Contracts for Difference (CFD) are more convenient short selling tools. CFDs are margin trading instruments with inherent leverage, allowing both long and short positions.

Opening a CFD account generally has looser requirements:

• Be a natural person over 18 years old
• Pass suitability assessments and identity verification

Many international CFD platforms have low minimum deposits, starting from $50. Due to limited liquidity in the local Taiwanese market, many investors choose overseas platforms to trade US stocks, forex, commodities, and other global assets.

IV. How to Choose Stocks and Timing Worth Shorting

Find Stocks with Fundamental Negative Factors

The premise of short selling is that the stock price faces downward pressure. Investors need to identify stocks or assets with clear negative catalysts.

For example: companies with declining revenue, negative net profit, industry demand slowdown, tightening regulations, etc. US steel stocks (X) are a typical case. Due to slowing US economic growth and a sharp decline in steel demand, the stock fell from a high of $47.64 in February 2018 to $4.54 in March 2021, a drop of over 90%. In such a clear downward trend, investors only need to short at relatively high levels to have a high probability of profit.

Recognize Signals of Price Deviating from Intrinsic Value

• Short-term speculation causing overvaluation: a stock surges temporarily due to market sentiment or irrational behavior, but the company’s fundamentals have not improved
• Major negative news: earnings misses, management changes, regulatory violations
• Technical reversal signals: stock reaches a short-term high or resistance level and begins to decline

Choose to Short at High Levels Rather Than Low

Many beginners make the mistake of shorting at low levels, hoping to “buy the dip and short.” But this approach carries huge risks:

• Limited profit potential
• Large losses if the stock rebounds
• The risk of the stock bottoming out and then rising again

The correct approach is to look for weak stocks at relatively high points or in resistance zones. At this stage, the probability of downward movement is higher, profit margins are more substantial, and upward potential is limited.

V. Four Disciplines of Short Selling

Always Set a Stop-Loss

This is the most critical risk management tool in short selling. Since losses can be unlimited, trading without a stop-loss is equivalent to gambling. Every trade must have a predefined loss limit, and once reached, close the position immediately to control losses.

Favor Short-Term Trading

Successful short sellers usually adopt a short-term strategy—completing trades within the same day and not holding overnight. The benefits include:

• Quick profits and timely realization
• Avoiding overnight risks (such as sudden positive news)
• Reducing the impact of price rebounds on returns

Many professional short sellers are day traders, completing entries and exits within hours or minutes to maximize risk avoidance.

Be Cautious with Capital Allocation

Shorting opportunities are not frequent. Instead of diversifying investments or trading in batches, wait for high-probability setups and allocate capital reasonably. “Reasonably” here does not mean heavy positions but rather within your risk tolerance, assigning appropriate position sizes to ensure you can withstand losses if the market reverses.

Strictly Follow Trading Logic

The stock market is full of uncertainties. Investors must have clear reasons for entering and exit plans, whether going long or short. Entering trades without confidence only increases the probability of losses.

VI. Alternative Tools and Platform Considerations for Short Selling

Futures vs Margin Loans vs CFDs

Margin short selling has limitations: liquidity depends on market supply, higher transaction costs, and requires opening an account for over three months.

Futures offer higher leverage but involve costs for rollover and are not available for all stocks.

CFD contracts have many advantages: support for global assets, adjustable leverage, no platform commissions, flexible trading hours, and no expiration limits. For investors wanting to short, CFDs are a more modern tool.

Key Criteria for Choosing a Trading Platform

Regardless of the instrument, platform security is always the top priority:

• Regulatory background: Confirm whether the platform is officially regulated in its registered country (e.g., ASIC in Australia, FCA in the UK)
• Fund safety: Understand the platform’s fund segregation policies and protection mechanisms
• Trading costs: Compare commissions, spreads, overnight fees, etc.
• Supported assets: Ensure the platform supports the assets you want to trade
• System stability: Reliable execution speed during peak trading times

Many international platforms are regulated in multiple countries and offer a wide range of assets, including US stocks, forex, commodities, and cryptocurrencies. Instead of being attracted solely by domestic platforms’ familiarity, it’s better to choose a well-rounded international platform with comprehensive tools and low costs.

Conclusion: Final Warning on Short Selling

Short selling is not a sophisticated investment skill but a high-risk hedging tool. Before engaging, investors must fully understand:

• Losses are theoretically unlimited, while gains are capped
• It requires strong psychological resilience and strict discipline
• There is no perfect prediction—only risk management
• No one can earn beyond their own knowledge

There are countless cases of total loss due to short selling in the market. Protecting capital, operating steadily, and continuous learning are the true long-term paths to profit. Short selling can be a tool in your investment toolbox but should never be your main strategy.