Buying & Selling
BuY & Going long
Opening a buy position will sound most familiar to most beginning investors. Opening a buy position, or going long on an asset, simply means that you buy an asset with the expectation for its value to go up. You buy, hold on to it, and sell at a higher price to make profit (or a lower price with loss).
When you open a buy position, think of it that you actually bought something from the market at the current market price, and that you will sell that asset back at a given point in time at that time's current market price.
Sell & Going Short
Opening a sell position may seem a bit more complicated at first. Opening a sell position, or shorting an asset, simply means that you sell an asset (which you don't own) with the expectation of its value to go down. You sell, hold on to it, and buy it back at a lower price to make profit (or a higher price with loss)
When you sell an asset (you don't own), think of it that the bank or broker lends you the asset and that you sell it at the current market price. You are ought to buy it back in the future in order to close that position at that time's current market price, when you hope prices will get lower.
Imagine Company DEF's stock price is at €100.
You open a buy position, starting an agreement (CFD) with your broker. If the stock price increases with 12%, you win €12 in value. If the value of the stock decreases 12%, you lose €12 in value.
You open a sell position, starting an agreement (CFD) with your broker. If the stock price increases with 12% (meaning that you will have to buy back that asset at a 12% higher price) you lose €12 in value. If the value of the stock decreases 12% (meaning that you will have to buy the asset back at a 12% lower price), you win €12 in value.
Technically, the settlement of the contract only takes place at the moment the agreement (CFD) ends, that is at the moment the position is closed. With CFD trading, it easy to increase your exposure to the market far beyond what you can actually pay, just by initiating agreements. Brokers like eToro however, hold on to the full amount of the underlying asset during the execution of the agreement. With this way of working, the trader gets a better understanding of his actual exposure to the market, which promotes overall safer CFD trading.
Shorting allows investors to bet against downturns in the market. However, holding sell positions usually incur fees. Think of those fees as 'asset lending fees' that the bank or broker incurs to you for lending out the asset. Holding on (unleveraged) buy positions usually comes free of charge.