Trade the UPs & DOWNs of Markets
One of main reason CFDs are a popular product is its ability to perform short selling. This gives investors the opportunity to make a profit when markets are falling. Some long-term investors use this feature as a hedging tool to protect their profits. They establish an opposite position to what they already have on stocks to prevent any losses due to short-term down trend in markets.
Example of Short-Selling in CFD Trading
Jasvind currently has a bearish view on Stock A. As he is not allowed to use normal stocks on the cash market to short-sell Stock A, he decides to use CFD. Stock A is currently trading at a price of $3.00. Jasvind SELLS 5,000 contracts at the Bid Price of $3.00.
A week later, the price of Stock A dropped to $2.50 and Jasvind decides to close his contracts. He BUYS 5,000 contracts of Stock A at the Ask Price of $2.50. The total profit Jasvind made from this trade is ($3.00 – $2.50) * 5,000 =.
However, if a week later the price of Stock A went up to $3.50 and Jasvind decides to close his contracts by buying 5,000 contracts of Stock A at the Ask Price of $3.50, he would have made a loss of ($3.00- $3.50) * 5,000 = $2,500.
Basics to CFD Trading