What is CFD trading?
CFD trading is the method of predicitng and taking a position on the price of underlying assets – like shares, indices, commodities, cryptos, forex and more – on a trading platform like ours.
A CFD – short for ‘contract for difference’ – is the type of derivative that enables you to trade the price movements of these financial markets with us.
With this form of trading, you don’t own the underlying asset – you’re only getting exposure to its price movements.
Some of the key characteristics of CFDs and CFD trading are explained in more detail below.
3 CFD trading essentials
You can go long or short with CFDs
When trading CFDs, you’re predicting whether an asset’s price will rise or fall. If you think the asset’s price will go up, you’ll ‘buy’ (go long) and if you think the price will fall, you’ll ‘sell’ (go short). The outcome of your prediction will determine whether you make a profit or incur a loss.
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. You should also take steps to manage your risk.
To open a long CFD position in our platform, you’d choose ‘buy’ on the deal ticket and to open a short position, you’d choose ‘sell’.
CFD trading is leveraged
Leverage in CFD trading enables you to get full market exposure for a small initial deposit, known as margin. In other words, you only have to put up a percentage of the cost of the position as a margin, to gain exposure to the full value of the trade.
It’s important to remember that potential profits and loss will be magnified, as it will be calculated on the full size of your position – not just the margin.
For example, if you want to open a CFD trade on 50 Tesla shares, with the share price at $800 per share, you’ll only require $8000 to get exposure to a $40,000 position. That’s because your initial margin would only be 20% of the total of $40,000 trade value ($8000). But remember, your profits or losses will be calculated on the full $40,000 value of the position, not the $8000 margin.
You'll open a leveraged position with margin
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.
Can you trade CFDs without leverage?
When you trade CFDs with us, you’ll always be using leverage. If you don’t want to take a position with leverage, then perhaps investing will be more appealing to you. We offer share trading on over 13,000 shares and over 2000 ETFs, from as little as $5 on AU shares, and zero commission on US shares.*
*Note for multi-currency accounts: These figures apply to clients who opt for the default setting of 'instant currency conversion'. Clients who choose to convert currencies manually will pay commission of 2 cents per share with a minimum charge of $10 on US stocks and, for European markets, we charge £10 / €10 per trade or 0.1%, whichever is higher. Other fees and charges may apply, please refer to our share trading charges.
CFDs behave similarly to their underlying market
CFD trading is designed to mimic trading each underlying market relatively closely. Our CFD prices are driven by the movements of the underlying market. Some asset prices have a spread built into the buy and sell price, while other CFD trades will incur a commission – it all depends on which market you're trading.
Is CFD trading right for me?
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.
If you prefer to buy and own financial assets, share trading could be more suited to you.
Why do people trade CFDs?
- Leverage: as CFDs are leveraged products, your initial outlay is only a percentage of the value of your position
- Flexibility: because you can go long or short with CFDs, you can trade no matter which way the markets are moving
- Longer hours: you can trade some markets outside of regular trading hours. Just keep in mind that the market’s opening price may differ from its out-of-hours price
- Hedging: this offers the opportunity to offset some of your losses against profits
5 steps to becoming a CFD trader
Find out how CFDs work
CFDs work by mimicking the underlying market. So, while you can mimic a traditional trade that profits as a market rises in price, you can also open a CFD position that will profit as the underlying market decreases in price.
Learn how CFD profit and loss works
To calculate the profit or loss earned from a CFD trade, multiply the deal size of your position (the total number of contracts) by the value of each contract. Then, multiply that figure by the difference in points between the price when you opened the trade and the price when you closed it.
Say, for example, that you buy 5 contracts when the asset buy price is 7500. A single contract is equal to a $10 per point, so for each point of upward movement you’d make $50 and for each point of downward movement you would lose $50 (5 contracts multiplied by $10).
As always, possible profits and losses will be magnified because these will be based on the full 7500 position, not the margin amount.
If you sell when the asset is trading at 7505, your profit would be $250
$250 = (5 x 10) x (7505 - 7500)
If you sell when the asset is trading at 7497, your loss would be $150
-150 = (5 x 10) x (7497.0 - 7500.0)
Note that these profits and losses exclude costs and charges. These could be overnight funding charges, commission or guaranteed stop fees.
Find out how to place a CFD trade
When you’ve decided which market you want to trade, you’re ready to place a deal. 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).
You can monitor all your open positions on the trading platform and close them by clicking the ‘close’ button. If you opened your position by buying, you could close by selling the same number of contracts at the sell price – and vice versa.
Learn about CFD timeframes
- Spot trading (also known as cash trading) is more popular for shorter-term trading, as the spot price is the immediate real-time price of the asset. We charge an overnight funding fee for spot positions that are kept open until the next day
- CFD futures are often used for medium- to longer-term trades, as they enable you to speculate on the price that underlying asset will be on a specific date. We don’t charge overnight funding on CFD futures – making it a popular choice for those who plan to keep positions open longer than a day or two
Know the costs when trading CFDs
Most of the time, the cost to open a CFD position is covered in the spread: meaning that buy and sell prices will be adjusted to reflect the cost of making the trade.
The exception to this is our share and ETF CFDs, which are not charged via the spread. Instead, our buy and sell prices match the price of the underlying market and the charge for opening a share CFD position is commission-based. By using commission, the act of taking a posiiton on share prices with a CFD is closer to buying and selling shares in the market.
If you keep a daily CFD position open past the daily cut-off time at 9am AEDT (typically 10pm UK time, although this may vary for international markets), you’ll be charged an overnight funding charge. This is to cover the cost of maintaining your position over the longer term – as you’re trading on leverage.
IG Academy - free CFD trading courses and resources
Becoming a successful CFD trader takes skill, knowledge and practice. We offer everything you need to get there, with a wealth of free trading courses and webinars at IG Academy, as well as a free demo account, complete with $20,000 in virtual funds to help build your confidence.
Develop your knowledge of CFD trading with us
Find out more about CFD trading and test yourself with IG Academy’s range of online courses.