Taking a long position means opening a buy trade because you expect the market price to rise. Taking a short position means opening a sell trade because you expect the price to fall.
In traditional markets, short selling may involve borrowing shares or another asset through a broker. With Contracts for Difference (CFDs), traders can gain exposure to rising or falling prices without owning or taking delivery of the underlying asset.
Although the basic idea is straightforward, long and short positions in CFD trading involve additional considerations, including spreads, leverage, overnight financing charges and dividend adjustments.
Quick Takeaways
- Going long means opening at the ask price and aiming to profit from a rise in price.
- Going short means opening at the bid price and aiming to profit from a fall in price.
- CFDs allow traders to open short positions without borrowing or owning the underlying asset because the contract is settled in cash.
- Short positions can carry theoretically unlimited loss risk because an asset’s price can continue rising.
- Long and short CFD positions held beyond the daily cut-off time may incur overnight financing charges.
How Do Long and Short Positions Work in CFDs?
In CFD trading, whether you take a long or short position determines whether you aim to benefit from a rising or falling market.
A Contract for Difference (CFD) is a derivative contract between a trader and a broker. Instead of buying or selling the underlying asset, the two parties exchange the difference between the asset's price when the position is opened and when it is closed.
Long Positions (Buying)
A long position is opened at the broker's ask price, which is the higher price in the bid-ask spread, when you expect the market to rise. The position is closed by selling at the current bid price.
If the market rises far enough to cover the spread and any applicable trading costs, the position may make a gain. If the market falls instead, the position records a loss.
Short Positions (Selling)
A short position, often referred to as what is short selling, is opened by selling at the bid price and closed by buying back at the current ask price.
This type of position is used when you expect the market to fall. If the price declines, the position may make a gain. If the market rises, the position records a loss.
Because CFDs are cash-settled contracts, you do not need to borrow physical shares, gold or foreign currency before opening a short position. Instead, the broker manages the trade through its liquidity arrangements or internal risk management systems.
For a broader explanation of how these derivatives work, read our guide to what is CFD trading.
Long vs Short Positions: Key Differences and Risks
Long and short positions may appear symmetrical because one benefits from rising prices and the other from falling prices, but each direction of long and short positions carries its own cost structure and risk profile in CFD trading.
Variable | Long Position | Short Position |
|---|---|---|
Market expectation | Bullish: the trader expects prices to rise | Bearish: the trader expects prices to fall |
Order execution | Opens at the ask and closes at the bid | Opens at the bid and closes at the ask |
Potential gain | Closing bid is above the opening ask | Closing ask is below the opening bid |
Maximum unleveraged loss | Generally capped at 100% if the asset falls to zero | Theoretically unlimited because the price can continue rising |
Overnight financing | Usually pays a benchmark rate plus the broker’s charge | May receive or pay financing, depending on rates and borrowing costs |
Dividend adjustments | May receive a cash credit | May receive a cash debit |
The main difference is the structure of the potential loss.
When you buy an asset, its price cannot normally fall below zero. Without leverage, the maximum loss on a long position is therefore limited to the amount invested.
In practice, short positions are generally understood to carry asymmetric risk because an asset's price can theoretically continue rising without a fixed upper limit.
If a company’s share price or a commodity rises sharply following unexpected news, strong earnings or a change in market sentiment, losses on an unhedged short position can increase quickly.
For a long position, the downside risk is limited to zero. This means the maximum possible loss is 100% of the investment if the asset price falls from the entry level to zero.
By contrast, a short position carries theoretically unlimited loss risk. Any rise above the entry price increases the loss, and there is no upper limit to how high the market price can climb.
Asset markets have also tended to rise over long periods, supported by factors such as inflation, corporate earnings growth and economic expansion. As a result, holding short positions against a broader upward trend may require more precise timing and tighter risk controls.
The Cost of Direction: Overnight Fees and Borrowing Costs
Choosing a direction is only one part of a CFD trade. Holding the position over time may create ongoing costs that reduce the final result.
When a CFD position remains open beyond the broker’s daily cut-off time, the broker may apply an overnight fee, also known as a swap or financing charge.
These charges can depend on benchmark interest rates, the broker’s administrative fee and any borrowing costs linked to the underlying asset.
Long CFD Financing
When you open a leveraged long position, you are effectively using broker-provided financing to control the full contract value.
The broker may charge a benchmark interest rate plus an administrative fee, with the exact margin varying by broker and asset — traders should check their broker's official fee schedule for the precise rate applied to their account.
Short CFD Financing
A short position may, in theory, create a cash credit. Depending on prevailing interest rates, the trader may receive interest after the broker’s charges have been deducted.
However, short positions can still result in a net daily charge. This is more likely when interest rates are low or when the underlying asset is difficult to borrow, such as a heavily shorted share.
In these cases, institutional borrowing fees may be higher than any interest credit.
Dividend Adjustments on CFDs
Dividend payments can affect share and index CFDs, and the treatment differs depending on whether you hold long and short positions on the ex-dividend date.
Long Positions
If you hold a long share or index CFD on the ex-dividend date, the broker may apply a cash credit to your account. This is intended to reflect the dividend adjustment in the underlying market.
Short Positions
If you hold a short share or index CFD on the ex-dividend date, the broker may debit your account by the relevant dividend amount.
This adjustment reflects the expected fall in the asset’s price after the dividend is paid.
Example: The Effect of Holding Costs
Consider a hypothetical trade covering 100 shares of a stock CFD priced at £100, using an example leverage ratio of 1:5 and an example margin requirement of 20%, for illustrative purposes only.
Trade Size: 100 Shares × £100 = £10,000 Notional Value
Margin Required at 20%: £2,000
Scenario A: Long Position Held for Five Days
Initial spread cost: £2.00
Daily overnight charge: £1.80 × five days = £9.00
Total holding cost: £11.00
Scenario B: Short Position Held for Five Days
Assume the underlying share is difficult to borrow and pays a dividend.
Initial spread cost: £2.00
Daily overnight charge: £2.50 × five days = £12.50
Dividend adjustment: £15.00
Total holding cost: £29.50
This example shows how holding costs for long and short positions may accumulate differently, particularly on short positions involving dividend-paying or difficult-to-borrow assets.
Managing Risk Across Long and Short Positions
Risk management for long and short positions should reflect the way markets behave in both directions.
Markets can sometimes fall more quickly than they rise. Panic selling may create sharp downward moves, while upward trends are often more gradual. However, short positions can also face sudden price spikes, particularly when unexpected news triggers aggressive buying.
Stop-Loss Execution and Gap Risk
A standard stop-loss order is designed to limit losses by becoming a market order once the trigger price is reached.
However, it does not guarantee that the position will close at the exact stop price.
If the market gaps beyond the stop level, the order will usually be filled at the next available price. This can result in slippage.
Gap risk affects long and short positions differently: for a long position, the market may gap sharply lower, while for a short position, it may gap sharply higher.
Avoiding a Short Squeeze
A short squeeze occurs when an asset with a high level of short interest rises suddenly, often because of positive news, strong buying pressure or changing market sentiment.
The process may develop as follows:
- The asset price begins to rise unexpectedly.
- Short sellers experience increasing unrealised losses.
- Stop-loss orders and margin calls force some traders to close their positions.
- Closing a short position requires a buy order.
- This additional buying pushes the price higher and may force more short sellers to exit.
This feedback loop can cause a rapid upward move.
Using appropriate position sizes and monitoring market conditions may help reduce exposure to short-squeeze risk, although losses can still occur quickly.
Conclusion
Long and short positions allow CFD traders to gain exposure to both rising and falling markets.
A long position aims to benefit from a price rise, while a short position aims to benefit from a price fall. However, direction is only one part of the trade.
Long positions may involve ongoing financing charges, while short positions may face borrowing costs, dividend adjustments and theoretically unlimited loss risk.
Accounting for spreads, overnight fees, leverage and the different risk profiles of each direction can help traders make more informed decisions and manage their exposure more carefully.
For further context on regulatory risk warnings for retail CFD trading, see the FCA's official guidance on CFD risk disclosure.
FAQ
What is the main difference between long and short positions?
The main difference is market expectation and execution. Going long means buying at the Ask price to profit when the market rises. Going short means opening a sell position at the Bid price to profit when the market falls.
Can you lose more than your initial deposit on a short position?
In unhedged traditional asset trading, short positions carry theoretically unlimited loss because prices can rise indefinitely. In retail CFD trading, leverage amplifies these losses rapidly during sudden price surges, though negative balance protection regulations in major jurisdictions cap total losses at your account equity balance.
How do overnight swap rates affect long versus short positions?
Holding any CFD position past the daily cut-off time incurs overnight financing fees. Long positions pay interest to cover the leveraged capital borrowed from the broker. Short positions theoretically earn interbank interest, but borrowing surcharges on hard-to-locate assets often result in a daily net charge.
What is a short squeeze in CFD trading?
A short squeeze occurs when a rising market forces short sellers to close their positions by placing buy orders to limit losses. This sudden influx of buy orders accelerates upward momentum, triggering further stop-losses and driving prices even higher in a rapid feedback loop.
Do short CFD positions receive dividend payments?
No. While holding a long equity CFD on the ex-dividend date results in a cash credit adjustment equivalent to the dividend, holding a short CFD position results in an automatic cash debit from your account balance to offset the price drop caused by the payout.