CFDs: going long vs going short

Understand the concept of going long vs going short with contracts for difference (CFDs).

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 61%-79.8% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

When trading, you’re likely to come across the terms “going long” or “going short”. You might also hear people talking about “shorting the FTSE100”, which means they expect the value in the FTSE100 to fall and therefore are adopting a short position, which means you’re selling ahead of it. It’s possible to “sell” even if you don’t own the underlying asset, we go into this in some detail below. Find out the key differences and how it works.

What does it mean to go long?

Going long is the purchase of an asset. You might choose to do this if you expect the prices to rise in value, which means you can then sell at a later date, for a higher amount.

What does it mean to go short?

Going short is usually the sale of an asset. It’s possible to do this with an asset that you don’t actually own (confusing, we know!). You might choose to do this if you think the value of the stock will go down.

How can you sell something you don’t own?

You can take a short position even when you’ve not bought the stocks. This is done by borrowing the stocks from your provider. You borrow them and sell them when you think the value is about to decrease, then purchase them again at the decreased price to return to your provider.

Compare CFD trading accounts

Name Product Spreads from What you can trade Link
IG CFD
IG CFD
0.3 points
Forex, commodities, indices, shares, ETFs, bonds, interest rates, sectors
Go to site
70% of retail CFD accounts lose money
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.
City Index CFD
City Index CFD
0.5 points
Forex, commodities, indices, shares
Go to site
67% of retail CFD accounts lose money
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
Pepperstone CFD
Pepperstone CFD
0.0 pips
Forex, indices, commodities, stocks
Go to site
79.8% of retail CFD accounts lose money
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79.8% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Plus500 CFD
0.01%
Shares, commodities, forex, indices
Go to site
72% of retail CFD accounts lose money
More Info
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 72% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
eToro CFD
eToro CFD
N/A
Stocks, commodities, currencies, indices
Go to site
68% of retail CFD accounts lose money
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
Saxo Markets CFD
Saxo Markets CFD
2 points
Stocks, indices, forex, commodities, options and bonds
Go to site
61% of retail CFD accounts lose money
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 61% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs, or any of our other products work, and whether you can afford to take the high risk of losing your money. The value of your investments can go down as well as up. Losses can exceed deposits on some margin products. Professional clients can lose more than they deposit. All trading carries risk.
loading

Compare up to 4 providers

What is a contract for difference?

A contract for difference (CFD) is a contract between you and your broker based on the value of a particular asset. The amount of profit or loss you make is determined by the “entry” price (the price when you take out the contract) and the “exit” price (the price when you end the contract).

You can trade CFDs in assets such as shares indexes, shares and commodities such as gold or oil.

Must read
Title

CFDs are normally purchased on a margin basis: every financial derivative has its own percentage. The margin can be identified as a deposit for the purchase of the particular asset. If you buy 100 shares at £5 each and the margin is 5%, you will pay (£5 x 100) x 5% which equals to £25. The shares total is £500, but you only need a margin of £25 to open the position.

Example
Long vs short

For example, stock XYZ has a current trading price of £5. Let’s say that you expect the price to increase and you’ve got £5,000 handy. You could choose to invest in 20,000 shares, totalling £100,000 with your margin of 5%. .
If the price over a two week period goes up to £5.10 per share, then the shares that you own will be worth £102,000, which is a £2,000 gain. You can then sell at this price to realise the gain.
Please keep in mind that this is gross profit and that you have to subtract the cost of the trade being open for two weeks and also the trading commissions due. At the end of this calculation you will get the net profit from the long position.

The short position

If you think the value of the asset or security is going to go down then you can choose to take a short position. Going back to our example of XYZ, let’s say it trades at £5 and you expect that it will decrease in value.

Using the same figures as before, with £5,000 and a 5% margin, you can get access to 20,000 shares of XYZ at a total value of £100,000. To take a short position or “short” XYZ, you’d sell the shares.

Let’s assume that the stock decreases to £4.75 in a couple of weeks. Your 20,000 shares are now only worth £95,000, as expected, so you can buy them back at £5,000 gross profit.

Your position and interest rates

One of the main things that impact you when you take a position is the interest rate. If you take a long position (or buy) then you may have to pay interest for positions held overnight.

If you choose to take a short position (or sell) then you’ll have interest paid to you if you hold the position overnight.

There isn’t a universal interest rate that all providers use, so it’s worth checking with your provider how much it charges for this.In general, the provider will have some kind of reference rate and will add a specific percentage when going long and subtract it when going short.

What’s the difference between going long and going short?

The difference between the long and short positions lies basically in the interest rate that has to be subtracted from the gross profit in the case of the long position and added in the case of the short position.

Here you can see an example on how the long and short positions work:

Long OptionShort Option
Interest Rate5%5%
Commission Rate0.1%0.1%
Value (present)£150,000£150,000
Fee CFD Position (open)£150£150
Future Value£160,000£140,000
Fee CFD Position (closed)£160£140
Profit – gross£10,000£10,000
Minus fees£310£290
Interest subtracted (long)£257
Interest added (short)£235
Profit – net£9,433£9,945

In this particular case you could make a higher profit from the short position because of the “interest” factor.

Let’s assume that in both cases you get a loss. In the long position you have to add the interest, while in the short position you need to subtract the interest. In such cases going long will minimise the loss, whereas going short will increase the loss.

Using leverage could also boost your profits as much as your losses: it would be better to limit this financial tool if you are a newbie.

Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage (borrowing to invest). Between 74% and 89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
The offers compared on this page are chosen from a range of products we can track; we don't cover every product on the market...yet. Unless we've indicated otherwise, products are shown in no particular order or ranking. The terms "best", "top", "cheap" (and variations), aren't product ratings, although we always explain what's great about a product when we highlight it; this is subject to our terms of use. When making a big financial decision, it's wise to consider getting independent financial advice, and always consider your own financial circumstances when comparing products so you get what's right for you.

More guides on Finder

  • Bitcoin ETFs

    Find out what a Bitcoin ETF is and if you can invest in one from the UK.

  • Ethereum (ETH) price prediction 2021

    What affects the value of Ethereum (ETH) and how might the price of ETH fluctuate in the year ahead? Find out in this comprehensive guide.

  • Best Portfolio Trackers of 2021

    Crypto portfolio trackers are a must to stay on top of your crypto investments. Here’s our list of the standout trackers to consider with pros and cons for each.

  • Missguided review: Prices, sizes, value for money

    Find out whether customers think Missguided is any good and what the brand’s different policies are.

  • Gemini vs Coinbase

    We compare these two large cryptocurrency exchanges to see how their fees, features and customer support stack up.

  • Mortgage for a hotel

    In-depth guide to taking out a commercial mortgage to buy or refinance a hotel. Find out how to get the best rates, factors lenders consider and what you need to apply.

  • 10 ways to improve your credit score

    The best methods for getting your credit rating in top shape, and boosting your credit score.

  • Finder’s Bitcoin Predictions Report: December 2020

    We asked 47 experts for their cryptocurrency price predictions and took a deep dive into the Bitcoin price rally.

  • IPO vs direct listing: What’s the difference?

    Find out the difference between an IPO vs direct listing when companies choose to float on a stock exchange. We’ve compiled the key differences between the two.

  • Why it pays to be a patient investor

    One way to develop healthy investing habits is to make regular contributions to your investment pot over a period of time, instead of investing a large lump sum. This is called “pound-cost averaging”. It’s a way of investing without trying to time the market.

Ask an Expert

You are about to post a question on finder.com:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked
Finder.com provides guides and information on a range of products and services. Because our content is not financial advice, we suggest talking with a professional before you make any decision.

By submitting your comment or question, you agree to our Privacy and Cookies Policy and Terms of Use.

Questions and responses on finder.com are not provided, paid for or otherwise endorsed by any bank or brand. These banks and brands are not responsible for ensuring that comments are answered or accurate.
Go to site