The Basic Concept
A CFD — contract for difference — is an agreement between you and a broker to exchange the difference in an asset's price between the time you open a position and the time you close it. If you buy a CFD on gold at £1,800 and close it at £1,850, you pocket the £50 difference. If it drops to £1,750, you lose £50.
The key distinction: you never own the gold, the shares, or the currency. You're trading the price movement only. This means you can go long (profit from rising prices) or short (profit from falling prices) on any available market.
How CFDs Work in Practice
When you open a CFD position, you choose the instrument, the direction (buy or sell), and the size of your trade. The broker quotes two prices: the bid (sell price) and the ask (buy price). The gap between them is the spread — and that's typically how the broker earns revenue.
CFDs are traded on margin, meaning you only need to deposit a fraction of the total position value. If the margin requirement is 10%, a £10,000 position requires just £1,000 in your account. This is called leverage — it amplifies both your profits and your losses.
What Can You Trade as CFDs?
The range is broad. Most brokers offer CFDs on forex pairs, stock indices (FTSE 100, S&P 500, DAX), individual shares, commodities (gold, oil, natural gas), and cryptocurrencies (Bitcoin, Ethereum). You access all of these through a single trading account and platform.
This flexibility is one of the main reasons traders choose CFDs. Instead of opening separate brokerage accounts for different asset classes, everything sits under one roof.
The Risks You Need to Understand
CFDs are leveraged products. That means your losses can exceed your initial deposit if you don't manage risk properly. A 10% move against a position with 10:1 leverage wipes out your entire margin. This is why stop-loss orders, position sizing, and risk management aren't optional — they're essential.
CFDs also carry overnight financing costs (swap rates) when held beyond the trading day. These costs can erode returns on longer-term positions, so understanding them before you trade is important.
Key Takeaways
- CFDs let you trade price movements without owning the underlying asset
- You can go long or short on forex, indices, shares, commodities, and crypto
- CFDs use leverage — amplifying both gains and losses
- Risk management is essential, not optional
- Overnight positions incur financing charges (swap rates)
