What is CFD trading?
CFD trading is the method of speculating on the underlying price of an asset – like shares, indices, commodities, 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 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 share dealing will be more appealing to you.
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.
As an alternative to CFD trading, we also offer spread betting, which offers you greater control of the deal size. Spread bets are also leveraged derivatives, but you’ll be putting up a certain amount of capital per point of movement in the underlying market. As with CFD trading, you’ll open a position using margin and any profits or losses will be magnified.
CFDs behave similarly to their underlying market
CFD trading is designed to mimic trading each underlying market relatively closely. 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.
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.
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
- Tax benefits: because you never own the underlying asset when trading CFDs, you could enjoy certain tax benefits
- 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: since you can offset any losses against profits for your capital gains tax (CGT) liabilities, CFDs can be a great way of hedging.2
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.
Say, for example, that you buy 5 FTSE 100 contracts when the buy price is 7500. A single FTSE 100 contract is equal to a £10 per point, so for each point of upward movement you would 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 FTSE 100 is trading at 7505, your profit would be £250
£250 = (5 x 10) x (7505 - 7500)
If you sell when the FTSE 100 is trading at 7497, your loss would be £150
-150 = (5 x 10) x (7497.0 - 7500.0)
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.
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). Learn more about how to place a CFD trade.
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 best 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 (also known as forwards) are best 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 speculating 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 (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.
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 £10,000 in virtual funds to help build your confidence in a risk-free environment.
Develop your knowledge of CFD trading with IG
Find out more about CFD trading and test yourself with IG Academy’s range of online courses.
1 Our best share dealing commissions are available to clients who opened three or more positions on their share dealing account in the previous month.
2 Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.