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The difference between going long and going short CFDs

by , 11 May 2015

As with other derivative products, when you trade contracts for difference (CFDs) you can go long or you can go short.

So what does this actually mean? And what difference does it make when you trade CFDs?

Read on to find out…


A quick introduction to CFDs


When you trade CFDs, you enter an arrangement between two parties to exchange the difference between the closing price of the contract and the opening price of the contract.

The two parties involved are you as the trader and the market maker. The market maker may be a bank, or a company or stock broker providing CFD trading.

These market makers are responsible for creating a market where you can trade CFDs. They provide liquidity to the market. Without them, you couldn’t trade CFDs.


What happens when you go long CFDs?


If you think a share is going to rise in price, you can go long CFDs. If this happens, you’ll make a profit from your CFD trade.

When you go long, you buy CFDs. In other words, you’re taking a long position. You’ll make a profit if the underlying asset, such as a share, rises above the price you entered the trade at.

For example, you think the price of Company ABC is going to rise. You put on a long CFD trade on Company ABC. If Company ABC’s share price rises, you’ll make a profit. If Company ABC’s share price falls, you’ll make a loss.


What happens when you go short CFDs?


If you think a share is going to fall in price, you can go short CFDs. If this happens, you’ll make a profit from your CFD trade.

When you go short, you sell CFDs. In other words, you’re taking a short position. You’ll make a profit if the underlying asset, such as a share, falls below the price you entered the trade at.

For example, you think the price of Company ABC is going to fall. You put on a short CFD trade on Company ABC. If Company ABC’s share price falls, you’ll make a profit. If Company ABC’s share price rises, you’ll make a loss.

So there you have it. The difference between going long and going short CFDs.

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The difference between going long and going short CFDs
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