CFDs are derivative trades, meaning that they enable you to trade a contract based on the price movement of an asset instead of the asset itself. When you open a CFD position on gold, for example, you are agreeing to exchange the difference in price of gold from when the position is opened to when it is closed.
There are several benefits to trading with CFDs:
- You can trade when markets are falling or rising
- You can trade 24 hours a day on a huge variety of markets
- There is no stamp duty to pay on your profits1.
How do you trade CFDs?
When you trade CFDs, you’ll see two prices based on the underlying market price:
- The buy price, which is higher than the market price. Trade at this price, and you’ll earn profit if the asset becomes more valuable.
- The sell price, which is lower than the market price. Trade at this price, and you’ll earn profit if the asset becomes less valuable.
The difference between the two prices is called the spread. Share CFDs are not charged using a spread: instead, the IG price is the market price and you pay commission on the trade.
The further the asset moves in the direction you have traded, the greater your profits. The further it moves against you, the greater your losses.
What is leverage?
CFDs are traded on leverage, which means that you only have to put up a portion of the total value of a trade in order to open your position. A trade worth £10,000, for instance, might only require a deposit of £500 at the outset.
Leverage means that your investments can go much further, but it also means that the risks are much greater and you could even lose more than you originally deposited. For this reason, it is especially important to manage your risks when trading CFDs.