CFD Trading Explained: Benefits, Risks, and Platforms

adminมิถุนายน 8, 2022

For example, if you want to place an order for $1,000-worth of Brent crude oil and your broker requires 10% of margin, you will need only $100 as the initial amount to open the trade. So, let’s say you’re planning to trade gold, because you think the price is about to increase. Trading CFDs, you don’t measure the size of your trade in ‘points’ like you with spread-betting. However, all brokers will also ask you to keep what’s known as a ‘maintenance’ margin. And it’s also worth noting that prices don’t just move quickly, they can also move in a non-linear fashion. This is what we mean when we say leverage can cause you to lose more than your initial stake.

  1. This means that if you trade against, it, your losses can be technically infinite.
  2. This means that your initial stake must be transferred from dollars to pounds, and then any profits must be traded back.
  3. Be sure to check in advance if you plan on making it part of your strategy.
  4. If you think the value of the asset you’re trading will fall, you’d ‘sell’ (go short); if you think it will climb, you’d ‘buy’ (go long).
  5. Most successful CFD traders are veteran traders with a wealth of experience and tactical acumen.
  6. Suppose that the share price of GlaxoSmithKline increases to £24.80 in 16 days.

CFDs allow investors to easily take a long or short position or a buy and sell position. Since there is no ownership of the underlying asset, there is no borrowing or shorting cost. Brokers make money from the trader paying the spread meaning the trader pays the ask price when buying, and takes the bid price when selling or shorting.


If the market price of the asset moves in the same direction as your CFD trade, you will make a profit. Traditional investments bring higher costs, while trading with CFDs allows you to trade various markets based on price changes without owning the assets themselves. Therefore, you can diversify your trading portfolio on one CFD broker without using various platforms.

Develop your knowledge of CFD trading with us

It is important to have a solid understanding of the market and the underlying asset being traded, as well as to use risk management strategies to mitigate potential losses. CFD trading can be a very useful – and profitable – strategy if you are looking to hedge investments in the underlying shares and assets the CFDs represent, especially if the market is volatile. It’s not required that you already have other investments and solely use CFDs as a hedging investment. Just make sure that you fully understand the risks involved before you begin trading CFDs. CFD (Contracts for Difference) trading is increasingly popular with experienced investors, but anyone can try it.

Cryptocurrency CFDs

When you place a CFD trade, you are not actually buying the underlying asset. Had the value of your trade fallen to £4400, you would have lost £400, despite your initial capital injection being worth only £240. All positions on instruments denominated price action indicators in a currency that is different from your account currency, will be subject to a conversion fee at the position exit as well. The ability to short or long on a trade with the same ease can be a major benefit for traders who regularly do both.

This is the day where potential buyers of a company’s shares stop being eligible for an upcoming dividend payment. CFDs cover a wide range of markets, including stocks, indices, commodities, currencies, and cryptocurrencies. This provides traders with opportunities for diversification within a single trading account.

Exploring CFD Trading Platforms

The company provides extensive educational material, including online courses and trading guides. For example, say an investor buys 100 Shell share CFDs at 500p and then sells them at 550p. First, we provide paid placements to advertisers to present their offers. The payments we receive for those placements affects how and where advertisers’ offers appear on the site. This site does not include all companies or products available within the market. Some countries may have favorable tax treatment for certain types of financial trading, while others may impose stricter rules.

Differences between CFD trading and traditional trading

As with conventional share dealing, the return from a trade is determined by the size of the investor’s position and the number of points the market in question has moved. But instead of buying contracts to open a position, the investor sells them instead. The specific treatment depends on factors such as your residency, the duration of your trades, and whether trading is considered a business or a personal investment. Yes, it is possible to make money trading CFDs; however, trading CFDs is a risky strategy relative to other forms of trading. Most successful CFD traders are veteran traders with a wealth of experience and tactical acumen. The net profit of the trader is the price difference between the opening trade and the closing-out trade (less any commission or interest).

There is usually no commission for trading forex pairs and commodities; however, brokers typically charge a commission for stocks. For example, the broker CMC Markets, a U.K.-based financial services company, charges commissions that start from 0.10%, or $0.02 per share, for U.S.- and Canadian-listed shares. The opening and closing trades constitute two separate trades, and thus you are charged a commission for each trade. Although CFDs allow investors to trade the price movements of futures, they are not futures contracts by themselves. CFDs do not have expiration dates containing preset prices but trade like other securities with buy and sell prices. Contracts for differences can be used to trade many assets and securities including exchange-traded funds (ETFs).

Think of it as ‘collateral’, to prove to the broker that you aren’t making trades you can’t afford to make, and that you can cover yourself in the event of losses. Again, that might not sound like much, but when you’re using leverage even a 10-point fall could mean a big loss. And remember, if this was a short trade, there would be no limit to your potential losses. You can in fact lose more than your initial capital if the markets move against you. The fact that while leverage can ‘amplify’ your gains, it can also amplify your losses.

The size of the position taken (the contract value) is illustrated below. A contract for difference (CFD) is a type of financial derivative in finance. This guide has everything you need to know about CFD trading explained in simple terms. CFDs allow you to have high leverage, which can be both an enormous benefit or the most significant risk factor.

This is why it’s important to understand how to manage your risk. CFD trading allows you to take a position on the price of an instrument without actually owning the underlying asset. One of the most unique aspects of CFDs is that they enable you to profit from falling markets as well as rising ones. The term CFD stands for “contract for difference”, a popular product that enables people to trade a wide range of financial markets.

We offer share dealing on over 13,000+ shares and over 2000 ETFs, from as little as £3 on UK shares, and zero commission on US shares1. Our best share dealing commissions are available to clients who opened three or more positions on their share dealing account in the previous month. It’s important to note that both ‘buying’ and ‘selling’ can result in a loss, and you should make sure that you understand how CFDs work before opening a position. We offer a free demo account to all traders looking to practise their trades before opening a live account. When acquiring our derivative products you have no entitlement, right or obligation to the underlying financial asset.

For example, if an investor held £5,000 of BT shares and was concerned that they were due for an imminent sell-off, one option would be to short sell £5,000 of BT CFDs to help protect a portfolio. If a trader went on to lose £500 on such a bet and had at least £500 deposited with the CFD provider, he or she would lose all £500, not just the £100 stake. To close the contract, investors do the opposite to what they did when they opened it. To speed up your search process, check out our list of the best CFD brokers, including reviews and breakdowns.

However, CFD trading is risky, and you could make a loss greater than your initial deposit amount. Our CFD prices are only driven by the movements of the underlying market. Some asset prices have a spread wrapped around it, while other CFD trades will incur a commission – it all depends on which market you’re trading. CFD margin requirements can vary depending on the market that you’re looking to take a position on – and not all of our markets will have the same margin rate. For example, we require a deposit equal to 5% of the total position size on popular indices like the FTSE 100, or 20% on shares such as Tesla. CFD trading works by allowing you to speculate on the price movements of a financial instrument without having to take ownership of the underlying asset.


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