There are two prices to look for in a CFD trade: buy price and sell price. Which one you choose will depend on whether you think the price will rise or fall.
Long position: A long position takes place when a trader places a BUY trade. Here, the trader expects the asset value will rise over time. The trader will BUY at a low price but SELL once the price rises.
Short position: A short position happens when the trader feels there will be a decline in the value of the asset and selects a SELL position. However, the trader intends to buy the contract back at a later stage if the value of the asset increases, thereby potentially profiting or losing from the entire exchange.
Example trading Gold CFDs
You see that GOLD.fs is currently priced at USD$1,720.15, and you speculate that its value will increase. To make a profit, you would open a ‘long’ position on the CFD at the current buy price. At the time of contract closing the price of GOLD.fs has risen to USD$1,801.32, and the CFD position has earned profit! If the price had decreased below the initial buy price, you would have suffered a loss.
Example trading Share CFDs
After Meta posted disappointed earnings, you are becoming convinced that the company is overvalued and that this is the beginning of a deeper correction instead of a temporary sell-off. You short Meta at $250. If the stock price of Meta continues to slide, your trade will show a profit. However, if the price of Meta rebounds and rises back above $250, you would be facing a loss on your position.
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As with any financial instrument, trading CFDs comes with risk. Using leverage can make CFDs riskier than non-leveraged products such as physical shares. Before you start trading on a live account, you should make yourself familiar with those products, practice in a risk-free demo environment and learn about risk management.
Options share some of the characteristics of CFDs. They can provide high leverage, flexibility and can be used for both hedging and speculation. However, there are some major differences. When buying a CFD, you agree to exchange the difference in price from when you opened the trade to when you closed it. Options give a trader the right (but not the obligation) to buy or sell an asset at a certain price in the future.
Options generally offer more flexibility and traders can create complex strategies using these instruments.
A CFD represents the price movement of an asset and the investor gets a clear picture of the value changes that happen during the duration of holding the position open.
When a trader agrees to a futures contract, they agree to buy or sell the underlying asset at a determined price and date in the future. It is a contract that will be executed in the future and the set price will stay unchanged, irrespective of the value movement of the asset. The buyer of a futures contract has to compulsorily execute the underlying asset when the contract expires. Consequently, the seller of the contract/deal has the obligation to provide the asset at the decided date.
Futures operate on prices established by the markets as they are traded on exchanges. On the other hand, CFDs work on prices established by the broker. Thus, the integrity of price is expected to be higher in the case of futures, when compared with CFDs.
Simply put, futures can be considered a less flexible and more structured alternative to CFDs.
Share CFDs allow you to utilise leverage when trading the movement of stock prices, meaning you can make higher profits with a smaller amount of capital. While this can increase returns, it also increases risk.
Trading share CFDs allows flexibility; you can go long (buy) when you expect prices to go up or go short (sell) in order to profit from falling stock prices.
However, with CFDs you will not have any voting rights, and the tax liabilities might differ from physical shares, depending on your country of residence.