How to trade CFDs

Beginner Guide

Learn the CFD basics

New to CFDs? Learn how you can trade CFDs and begin taking advantage of one of the world's largest financial markets.

What is a CFD?

CFDs or Contracts For Difference give you exposure to a market without needing to hold the actual asset. CFDs are a form of derivative that allows traders to gain exposure to an asset's performance without actually owning the underlying. Technically CFDs are contracts between two parties with a set value at expiration. If the closing price of your chosen instrument is above the strike price you've picked, then we'll pay you the difference. On the flip side, if it's below then you'll pay us the difference.

Why trade CFDs

CFDs offer you the ability to trade global markets whether they're rising or falling as you can go long or short (go long means buy, and short means sell). Unlike other financial instruments such as options, there isn't an expiration date on cash-based CFD trades either.

Who is a CFD trader?

CFD traders are individuals that have an interest in the financial markets. They may have experience as technical analysts, or simply want the flexibility to make leveraged speculative bets on different instruments. Whatever their background, they are not deterred by a steep learning curve and enjoy trading tools that exhibit a high level of transparency.

A CFD trader will have a higher risk tolerance than someone trading shares and is prepared to take a position that goes against market sentiment.

You need to think of what leverage can do to profits and losses - if a share increases in value by 10% from £100 you make £10, however, if it dropped in price by 10%, you would lose £100. The amount you can trade is not limited by the amount you deposit unlike other services but is heavily regulated by the FCA (Financial Conduct Authority).

The power of leverage in trading CFDs

Leverage is the earmark of CFDs. It allows you to trade on margins, using only a small percentage of your capital in comparison to the full performance of your contract.

A small deposit can gain you exposure to a huge asset class. CFDs are leveraged products which means you don’t have to pay the full market value of the position, you just need to put down a leveraged margin. This could be 5% in some cases, meaning you’ll only need to put down 0.5% of the full market value of the position.

This means you can achieve a sizable market exposure with a small initial capital outlay. For example, if you wanted to buy £100 worth of the FTSE 100 index from one of the UK’s leading spread-betting firms, and you had £2,000 in your account, it would require a cash deposit of half of this amount (£1,000). This is because they operate a 1:50 margin requirement. This means that for every £100 you want to trade in the market you will need £1 as capital. This generates an effective leverage factor of 50:1 against your initial deposit.

Cost to trade CFDs

There are different CFD trading account types, depending on your needs and the amount you want to trade.

To trade CFDs you pay a small upfront cost called the spread (the difference between the buy and sell price) of the benchmark you're trading. With CFD there can be extra fees involved so compare accounts carefully to find the right account for you depending on your trading requirements.

Note that your CFD positions are subject to either a daily rollover or an interest charge if you hold it beyond a daily rollover period which is set at 17:00 GMT 5pm London time. With daily rollovers, you can exit your position at any point before this time to prevent the application of the interest charge. Avoid trading costs by exchanging your CFDs before the expiry time.

Managing Trade risk

Leverage is a double-edged sword. It works both ways, it makes it possible to earn more but also to lose more.

Because CFDs are leveraged products, your losses could exceed the amount of money you deposited into your account. In extreme cases, your losses could be more than the total amount of money you deposited into your account.

For one thing, risk management is at the center of every successful CFD trader’s approach. With our range of stop-loss orders, you can customize the way you manage your trades so that you can get out if things go bad for you.

To manage the risks of trading, you trade in a maximum of two positions at the same time, and if you have a major position open, make sure it’s funded well above your worst-case scenario.

Here are some little-known risk management techniques that can improve your chances of making profits:
● Monitor account size and set stop losses
● Always have the right experience with CFDs
● Set a loss limit and a fixed percentage of equity use per trade
● Have a trading plan
● Keep it simple by avoiding moving average crossover systems
● Use diversification for protection
● Keep your emotions in check
● Keep a trading journal