A trader who engages in Contracts for Difference (CFDs) trading stands to gain from either an up or down market. Trading in CFDs is a flexible alternative to traditional trading, giving a trader the flexibility to trade on the price of an asset, rather than buying the asset itself. By not owning the underlying asset, the trader can profit from underlying markets rising in price as well as those falling in price. With CFDs, traders are allowed to trade from one trading account on the prices of different underlying assets, like shares, currencies, indices, and commodities like oil or gold. Each CFD has a buy price (ask or offer price) and sell price (bid price), based on the price of the underlying asset.
If there is an expectation that the price of the underlying asset will rise, the trader will buy. This is called “going long” (also referred to as “a long trade” or a “long position”), meaning buying a CFD to sell at a later stage.
Say the current market price of gold is $1 600 an ounce and the trader anticipates an increase, they will open the trade (buy) at the current price of $1 600 an ounce and close the deal (sell) when the gold price hits $1 620 an ounce. The profit will be – $20 USD. In terms of a short trade, a short trade will be opened when gold’s current market price is $1 600 an ounce and close the trade at $1 540 an ounce, making a profit of $60.
A long position suggests the trader will expect the value of the security or asset in issue to increase.
The investor bets $10 on ABC stock because he thinks it will rise in price. For example, if a trader has $10,000 and a 10% initial margin, he or she can buy 10,000 shares. Assume that at the CFD close-out in two weeks, the stock price has risen to $5.10. This would result in a $1,000 gain for the trader.
By taking a short position, a trader wagers that the price of a securities, index, commodity, or currency will fall.
At its current price of $10, ABC stock is likely to drop. In order to turn a profit on a $10,000 investment with an initial 10% margin, the trader must first sell the shares and then repurchase them at a higher price. The dealer is going to unload 10,000 shares.
If the stock price drops to $9.75 in the next few weeks, the 10% shortfall will be covered and the shares will have fallen in value. The trader will earn $2,500 in this instance.