CFD trading lets you take a position on a market’s price without buying the asset itself. You can trade prices rising or falling, and you only need a deposit to open a position.
What Is a CFD?
A CFD, or contract for difference, is an agreement between you and a provider to settle the change in a market’s price. You open a position at one price and close it at another, and the difference is added to your account as a gain or taken from it as a loss.
You never own the shares, coins or barrels behind the price. A CFD on Apple shares follows Apple’s share price, but you don’t become a shareholder. A gold CFD follows the gold price, but there’s no metal to store. On [BRAND], every market is traded as a CFD.
How a CFD Trade Works Step by Step
Pick a Market
Choose what you want to trade, like a currency pair, a share, an index or a commodity. Each market has its own trading hours, costs and margin requirements.
Choose a Direction
Decide if you expect the price to rise or fall. You buy if you think it will go up and sell if you think it will go down.
Set Your Position Size
Choose how much of the market to trade, for example 10 share CFDs or one lot of a currency pair. Your gain or loss grows with the size of your position.
Add a Stop Loss
If your platform offers it, set a stop-loss order to help limit potential losses. It sends a closing order when the price reaches your chosen level, though in a fast market the trade can close at a different price.
Close the Trade
When you close, the price difference multiplied by your position size is settled in your account, minus any trading costs.
Going Long and Going Short
Buying a CFD is called going long. A long position gains when the price rises and loses when it falls.
Selling a CFD is called going short. A short position gains when the price falls and loses when it rises. Because you’re trading the price alone, you can go short without owning the asset first, which is harder to do when you buy shares the traditional way.
Some traders also use a short CFD to offset part of the risk on shares or coins they already hold elsewhere. This is called hedging.
How Margin and Leverage Work
Margin
Margin is the deposit you put down to open a position. It’s shown as a percentage of the position’s full value. With a 20% margin requirement, a $1,000 position needs $200 of margin.
Leverage
Leverage is the same idea written as a ratio. A 20% margin requirement is leverage of 5:1, which means each $1 of margin controls $5 of market exposure. Leverage increases both gains and losses, because your result is worked out on the full position value.
When Margin Runs Low
If a trade moves against you, the losses come out of your account equity. When your equity falls too close to the margin your open positions need, you may get a margin call, and positions can be closed automatically to stop further losses.
A Worked Example
A company’s shares trade at $100. You buy a CFD on 10 shares, a position worth $1,000, with a 20% margin requirement. You put down $200.
| Share price when you close | Price move | Result on your position | Share of your $200 margin |
| $105 | +5% | $50 gain | +25% |
| $95 | -5% | $50 loss | -25% |
| $80 | -20% | $200 loss | -100% |
The same 5% move gives an equal gain or loss in either direction, and it’s worth 25% of your margin because of leverage. A 20% fall would use up the whole deposit. Trading costs would come off each result too.
What CFD Trading Costs
Spread
The spread is the gap between the buy price and the sell price. You buy at the higher price and sell at the lower one, which means every trade starts slightly behind by the size of the spread. Spreads are usually tighter on busy markets like major currency pairs.
Commission
Some CFD trades, particularly share CFDs, may carry a commission on top of the spread. Depending on the provider, it can be a percentage of the trade value, a fixed amount or a charge per share.
Overnight Financing
If you keep a position open past the end of the trading day, an overnight financing charge is usually applied. It’s based on your position’s size and interest rates, and it builds up every night the position stays open. This is one reason many CFD traders keep their positions short-term.
Dividend Adjustments
When a share pays a dividend, CFD positions on that share are adjusted. Long positions usually receive a credit and short positions are usually charged the same amount.
CFDs Compared With Buying the Asset
| Trading a CFD | Buying the asset | |
| Ownership | You trade the price only | You own the shares, coins or metal |
| Direction | Long or short | Usually long only |
| Money needed upfront | A margin deposit | The full value |
| Ongoing costs | Spread, possible commission, overnight financing | Dealing fees, possible custody or storage costs |
| Shareholder rights | None, though dividends are adjusted | Voting rights and dividends |
| Risk | Leverage increases both gains and losses | Your loss is limited to what you paid |
Common Mistakes New CFD Traders Make
Using the Maximum Leverage
The leverage on offer is a limit, and you don’t have to use all of it. Smaller positions give a trade more room before a normal price swing eats into your margin.
Treating a Stop Loss as a Fixed Exit
A standard stop loss closes your trade at the next available price. If a market gaps past your level, for example when it reopens after weekend news, the trade can close at a worse price than the one you set.
Forgetting About Overnight Costs
A trade that looks small on the day can build up a noticeable financing cost over a few weeks. Check the overnight charge before you plan to hold a position for long.
Risking Too Much on One Trade
Many traders limit how much of their account they’d lose if a single trade hit its stop loss. A trade sized this way leaves room to keep trading after a loss.
Confusing a Small Deposit With Small Risk
A $200 margin deposit can sit behind a $1,000 position. Your exposure is the full position, and that’s the figure to keep in mind when you size a trade.
Key Takeaways
- A CFD lets you trade a market’s price without owning the asset.
- You can go long if you expect a rise or short if you expect a fall.
- Margin is your deposit, and leverage increases both gains and losses.
- The main costs are the spread, any commission and overnight financing.
- A standard stop loss helps limit losses, but it can’t promise an exact exit price.
CFD Trading FAQs
Can you lose more than you deposit with CFDs?
It depends on your provider, where you live and your account type. In the UK, the EU and Australia, regulated retail CFD accounts must have negative balance protection, which limits your losses to the funds in your CFD account. You can still lose your whole account balance. Check that this protection applies to your account before you trade.
Is CFD trading the same as gambling?
CFD trading is regulated as a financial product, and prices follow real markets like shares, currencies and commodities. Traders base decisions on things like company results, economic data and price charts. It’s high risk, though, and regulators in many regions require providers to show what share of retail accounts lose money, which is usually more than half.
Are CFDs suitable for beginners?
CFDs can suit beginners who understand how margin and leverage work and start with small positions. Learning how costs, stop losses and margin calls work before trading makes a big difference. Our Learn the Basics guide covers these with a worked example. [link to: Learn the Basics]
Do you get dividends when you trade share CFDs?
You don’t receive dividends as a shareholder, because you don’t own the underlying shares. Eligible share CFD positions may receive a dividend adjustment. Long positions are generally credited and short positions debited, with amounts set by the provider’s terms. Share CFDs don’t carry voting rights.
Can you trade CFDs from any country?
CFD availability depends on where you live and local regulations. Retail CFD trading is restricted in some countries, including the United States, and providers can limit which countries they accept clients from. Check your eligibility before you register.