What is CFD trading? Our comprehensive guide

And remember, if this was a short trade, there would be no limit to your potential losses. When using leverage, any losses or gains are calculated on the total value of the trade, not the amount of capital. We’re also going to show you how to practise trading both long and short CFDs without risking any real money. If you want to become a more knowledgeable, confident trader, keep reading.

Interactive Brokers – The Second Best CFD Trading Platform in 2025

A trader will also need to consider which trading strategies to use when buying or selling CFDs. Had the individual spent their initial $1,000 to buy 20 shares (at $50 a piece) in the retailer, they’d have made a far-lower profit of $100 and an inferior return of 10% on their investment. The trader above has made a cool 50% return on their initial margin, which is far higher than they could have expected had they simply bought shares in Tony’s Tyre Company. Serious day traders looking to keep costs down may opt for a raw spread account with ultra-tight spreads and a low, fixed commission. Whilst the use of leverage can supercharge a trader’s earnings, massive losses can be racked up if markets move in an unexpected direction.

In traditional investments, one can only profit when the asset’s value increases. However, in CFD trading, going short enables traders to profit from market declines as well. Some investment products, including CFDs, are derived from other financial assets. Underlying asset refers to the real financial asset — for example, the actual share of ownership in a stock, or a barrel of oil — on which the financial derivative is based. It is the value of the underlying asset that drives the value of the financial derivative. The trader opens the position and sets parameters such as whether it’s a long or short position, leverage size, invested amount (margin), stop-loss and other parameters, depending on the broker.

Hedging in trading is a crucial risk-management strategy used by experienced traders, but it does not necessarily protect the orders to be closed out at one point. Some regulators require that new customers pass an ‘appropriateness or suitability’ test. This often means answering some questions to demonstrate that you understand the risks of trading on margin. It’s best to thoroughly educate yourself on how leverage and margin work before trading. If you think the price of an asset will fall, you would open a short (sell) position, profiting if it falls in line with your prediction.

It also means that a trade that goes against you can quickly result in a margin call. Like other CFD brokers, the margin interest and leverage afforded differ based on the financial instrument and the market. But IBKR traders can rest assured that they’re getting competitive rates, regardless of their trading style. These might not be large but still need to be factored into your strategy planning. In fact, these fees are one of the main reasons that CFDs are primarily used for short-term trading. If investing in CFDs over a longer period of time, the fees incurred could negate any potential profits or exacerbate any losses.

Exploring CFD Trading Platforms

• It could be a stock, an index, a currency or any other asset to which the broker provides access.
• They will then pocket the difference, which is paid by the brokerage.
• Suppose the current exchange rate offer hovers around 1.2143, while the bid rate is 1.214.
• Additionally, CFD brokers often offer tight spreads (the difference between buy and sell prices) and low commissions, making them a cost-effective option for frequent traders.
• Where we are at fault, we aim to put things right at the earliest opportunity.

While the leverage, market accessibility, and trading flexibility make CFDs attractive to experienced investors seeking diversified exposure, these advantages come with significant risks. A contract for differences (CFD) is a financial instrument traders use to speculate on prices without owning the underlying asset. When entering into a CFD, an investor and broker agree to exchange the difference between the opening and closing value of the underlying financial product. CFD trading in crypto allows traders to speculate on the price movements of cryptocurrencies like Bitcoin or Ethereum. This method enables trading on margin, offering the potential for profit in both rising and falling markets without owning the actual cryptocurrency.

Now let’s assume that the retailer’s share price has gone up to $55 over the next week. The trader has made a $5 profit per CFD, meaning their total profit on the trade stands at $500 (100 CFDs x $5). At this point, they decide to close out their position and book those profits. If an investor thinks the market will rise, they will go long and purchase a contract from their broker. Conversely, they will go short if they believe prices are going to fall. In this instance, they will borrow the CFD from the contract provider and sell it to the market.

Is CFD Trading A Good Idea For Beginners?

As with all trading, if you’re not comfortable with risking your capital, you shouldn’t trade. CFD positions can move fast, and you should monitor all positions carefully. Be sure to check in advance if you plan on making it part of your strategy. Say your silver trade suffers serious, quick losses and the price falls by £400.

If you opened your position by buying, you could close by selling the same number of contracts at the sell price – and vice versa. Trading CFDs could be right for you if you’re looking for a way to trade rising or falling markets, and if you want to open a position using margin. However, CFD trading is risky, and you could make a loss greater than your initial deposit amount.

CFD (Contract for Difference) trading allows investors to speculate on the price movements of various financial instruments without owning the underlying assets. When trading CFDs, you agree to exchange the difference in the price of an asset from the point at which the contract is opened to when it is closed. A contract for difference (CFD) lets you trade using just a fraction of the value of your trade, which is known as trading on margin, or leveraged trading. This allows traders to open larger positions than their initial capital may otherwise allow.

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• You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
• So to open a position that copies purchasing 500 shares of company X, you’d purchase 500 Company X CFD contracts.
• In both cases, when you close your CFD position, your profit or loss is the difference between the closing price and the opening price of their CFD position.

You will be able to see your profit or loss almost instantly in your account balance. Higher Cfd trader spreads can substantially eat into a trader’s profits, so it’s important to keep a close eye on this. When it comes to trading costs, the primary thing to consider is the bid and ask spread.

Margin vs. Leverage

CFDs are different in that there is no expiration date and you never own the underlying asset. CFDs provide traders with all the benefits and risks of owning a security without actually owning it or having to take any physical delivery of the asset. CFDs are essentially used by investors to make price bets as to whether the price of the underlying asset or security will rise or fall. After completing these steps, you can simply click “Buy” or “Sell” in your chosen broker’s online trading platform to submit your CFD order. Once executed, your trade confirmation should display all the details of the completed transaction.

There is also a high risk of losing money, which makes choosing a good broker even more important. Pepperstone will provide us with an initial balance of €10,000 in virtual funds. We’ll practice trading risk-free with that until we get things working correctly. The data feeds are all automated, and you can watch the world’s financial markets moving in real time.

1 lot of ‘Tesla’ stock is a share, which is currently valued at £180. 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. The example we just gave – the required margin to open a position – is known as the ‘initial’ margin. For instance, if the price of a share falls from 20.10 down to 20.00, it won’t necessarily move 20.10 to 20.09 to 20.08 and so on.

Closing the Position

Account management fees such as overnight financing charges also need to be considered, and sometimes slip under the radar. CFDs were invented in the 1990s as a means of allowing traders to access the markets more tax efficiently. In the UK, Stamp Duty Reserve Tax (SDRT) is a charge applied to purchases of equities.