What is CFD trading and how does it work?

What is CFD trading?

CFD trading is the method of speculating on the underlying price of an asset – like shares, indices, cryptos, 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.

We offer over 17,000 markets for you to speculate on with CFDs, including shares, indices, forex, commodities and more.

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’.

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.

We offer a free demo account to all traders looking to practise their trades before opening a live account. We also give you access to IG Academy – our education tool for traders.

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: 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.

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. These could be overnight funding charges, commission, or guaranteed stop fees.

Learn about CFD timeframes

With CFDs, you can either trade the spot market or with CFD futures – depending on the market that you’re looking to take a position on.

• Spot 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 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 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.

Learn more about the costs for CFD trading shares and ETFs, indices, commodities and forex.