Contract For Differences (CFD) – Chapter 5: Trading In Bullish & Bearish Markets

With CFDs trading, you are able to trade short or long position in the market. If you are expecting the price of a CFD to go up, you will then BUY that asset hoping to capitalize on the upswing. This is also known as going “LONG” on your market position. Conversely, if you are expecting that the price of a CFD will drop, you can actually SELL that CFD which you do not own now and buy it back later at a cheaper rate when the price has fallen. This is known as going“SHORT” on your market position. This allows you to profit even from a downtrend market. Once the price has declined, you will then buy back the same amount of the asset to close your market position.

For example, the stock price of Coca Cola is trading at $100. If you feel that the stock price is going to fall due to whatever reason, you can short sell the share at the current price of $100. If later the price did drop to $95, you can purchase back the same number of shares to close your market position after having realizing a profit of $5. Thus, if you had purchased 10 lots, you would have made $50,000. However, if the price had increased to $105, you would have incurred a loss of $50,000. The same concept is actually applicable in all financial markets.

The CFDs are actually financial instruments and not an asset per se. even then, it entitles the investor of CFDs certain privileges which the holders of the under laying assets have. These include the right to the dividend yield, and the splitting & merging of shareholders capital. These CFDs however, do not convey legal title of the company’s assets to the holder of the CFDs. Furthermore, there is also no voting rights and are not transferable or traded in the regulated financial market. This is just a contract between the investor and the brokerage firm. The providers of these CFDs instruments retain the right to close the market position of the investor or client regardless of whether the company have become insolvent or not. Lastly, CFDs are considered concluded or closed on the day they are settled.

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