Close Menu
Investment GuideInvestment Guide

    Zohran Mamdani Net Worth in 2025: A $200K Portrait of Integrity in Politics

    1st July 2025

    Rich Paul Net Worth in 2025: The $120 Million Empire of a Sports Powerhouse Who Changed the Game

    1st July 2025

    Patrick Whitesell Net Worth in 2025: Hollywood Power Broker, Billion-Dollar Moves & The Last Laugh

    1st July 2025

    Zach Bryan Net Worth 2025 – The Grit, the Guts, and the Gold Records

    1st July 2025
    Facebook X (Twitter) Instagram
    • Stamp Duty Calculator
    • Lease Extension Calculator
    Facebook X (Twitter)
    Investment GuideInvestment Guide
    • Home
    • About
      • Authors
    • News
    • Tools
      • Stamp Duty Calculator
      • Lease Extension Calculator
    • Guides
      • Digital Investments
      • Getting Started
      • Investment Strategies
      • Specialist Investments
      • Other
    Investment GuideInvestment Guide
    Home » What is CFD trading?
    Other

    What is CFD trading?

    Helen BarklamBy Helen Barklam2nd April 2021Updated:4th May 2023No Comments5 Mins Read
    Facebook Twitter Pinterest LinkedIn Tumblr WhatsApp Email
    Share
    Facebook Twitter LinkedIn WhatsApp Pinterest Email

    A CFD is a ‘contract for difference’. It is a leveraged derivative product which allows you to speculate on the price movements of securities (e.g. shares, indexes, forex, commodities) without ever owning the underlying asset.

    Using CFDs, it is possible to generate a profit not only when securities rise in value, but also when they fall.

    If you think a security will increase in value, you ‘buy’ (also known as ‘going long’). If you think the security will decrease in value, you ‘sell’ (also known as ‘going short’).

    The buy price exceeds the current market value, whereas the sell price is less than the current market value. The difference between the two is the ‘spread’.

    The ‘spread’ is how the market makers (i.e. the stockbroker facilitating the CFD contract) makes its money. The market maker profits from this spread irrespective of whether you make or lose money.

    If the market moves in the direction you predict, you profit. For example, if you ‘go long’ and the share price rises above your buy price, or you ‘go short’ and the share price falls below your sell price.

    Conversely, if the market moves against you, you will lose money. For example, if you ‘go long’ and the share price falls below your buy price, or you ‘go short’ and the share price rises above your sell price.

    How do CFDs work?  Worked example of a CFD buy order

    When you enter into a CFD, you are acquiring a contract for the price movement on a set number of securities.

    For example, if you bought a CFD for 10,000 shares in BP when the buy price was £3, and closed with a sell price rose to £3.10 (a 3.33% increase), you would generate £1,000 profit (£0.1*10,000).

    READ ALSO:  Flotation: definition and its role in finance

    If you were just buying BP shares, to get exposure to the price movement of 10,000 shares, you would need to purchase them at £30,000 (10,000 * £3). However, CFDs are a leveraged product which means that you can trade with a small deposit (‘margin’). For example, Trading 212 offers 5% margin on FTSE 100 CFDs. This means that if you wanted to buy a CFD for 10,000 BP shares, you would only need to deposit £1,500 (£3 * 10,000 * 5%).

    This leverage significantly increases the potential profit opportunity but also the risk to traders as it is possible to lose more than you originally deposit.

    Using the above example, if you had taken that bought a CFD for 10,000 BP shares, you would have initially required a deposit of £1,500 and would ultimately profit £1,000 when the position was closed.

    However, lets imagine the sell price falls to £2.85 (5% decrease). If you closed your position at this point, you would lose the full £1,500 deposit (10,000 * £0.15). If the sell price fell further to £2.80, you would actually be down £2,000 (10,000 * £0.2), meaning that you would lose £500 more than the initial deposit you made.

    For this reason, it is important to manage your risks through the use of ‘stop’ and ‘limit’ orders (read more about types of orders).

    Trading CFDs vs. buying shares

    We have already discussed that leverage (and the opportunities and risks that it brings) is the key difference between trading CFDs and buying shares. However, there are some other differences that you should be aware of:

    • If you purchase shares in the UK, you need to pay stamp duty on that purchase. However, as CFDs are derivative products, no stamp duty is payable when trading.
    • When you purchase a share, you own that security and pay the market price to acquire it in full. However, when you trade CFDs, you trade on margin. If you wish to keep your position open overnight, there is a financing cost associated. On Trading 212, the financing cost varies depending on the instrument you are trading (and also whether you are long or short on that instrument). The fees are then calculated by taking the quantity of CFDs * swap rate * number of nights. These fees are generally not significant in the context of the CFD exposure, however, you should be aware of this cost prior to trading.
    • At the point of buying a CFD, you are immediately in a loss-making position due to the market spread (i.e. the sell price is lower than the buy price you have agreed). This means that it is not possible to back out of your position without incurring a loss unless the sell price moves above the buy price.
    READ ALSO:  What is a stock appreciation right (SAR) and how to use it for employee incentives and retention?

    How to trade CFDs in the UK

    The most popular UK-based CFD platform is Trading 212. Trading 212 allows you to trade CFDs on shares, forex, indices and commodities in all the main markets with zero commission and tight spreads. Other CFD platforms include Plus500 and IG.

    Note that beginners should not jump into trading CFDs lightly – they are an advanced trading tool typically reserved for experienced traders. Before you invest real money, be sure to open a ‘virtual money’ account first. 

    Share. Facebook Twitter Pinterest LinkedIn Tumblr WhatsApp Email
    Helen Barklam

    Helen Barklam is Editor of Investment Guide. Helen is a journalist and writer with more than 25 years experience. Helen has worked in a wide range of different sectors, including health and wellness, sport, digital marketing, home design and finance. Helen aims to ensure our community have a wealth of quality content to read and enjoy.

    Related Posts

    Is a Free House Valuation Really Accurate in Today’s Market?

    12th June 2025

    8 Financial Lessons You Can Learn from Playing at Casinos

    11th June 2025

    Investing in High-Performance Machinery for Sustainable Industrial Growth and ROI

    3rd June 2025

    How UK Traders Can Secure Funded Accounts in 2025: The Real Deal

    19th May 2025

    A Guide to Using AI for Video Content Marketing

    24th February 2025

    Vyvy Manga

    9th October 2024
    Add A Comment
    Leave A Reply Cancel Reply

    Zohran Mamdani Net Worth in 2025: A $200K Portrait of Integrity in Politics

    By Sam Allcock1st July 2025

    Zohran Mamdani presents a strikingly different story—one based on modesty, genuineness, and firmly held values—in…

    Rich Paul Net Worth in 2025: The $120 Million Empire of a Sports Powerhouse Who Changed the Game

    1st July 2025

    Patrick Whitesell Net Worth in 2025: Hollywood Power Broker, Billion-Dollar Moves & The Last Laugh

    1st July 2025

    Zach Bryan Net Worth 2025 – The Grit, the Guts, and the Gold Records

    1st July 2025
    Facebook X (Twitter)

    Company

    About

    Contact

    Authors

    Privacy Policy 

    Terms and Conditions

    Categories

    Home 

    News 

    Stamp Duty Calculator

    Lease Extension Calculator

    Guides

    © 2025 Investment Guide

    Type above and press Enter to search. Press Esc to cancel.