What is CFD trading Learn how to trade CFDs online

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How to trade CFDs

CFD trading enables you to speculate on the future movements in a market’s price – going ‘long’ if you think it will rise or ‘short’ if you think it will fall. This guide shows you how to trade CFDs step-by-step, from opening an account to closing a position, and illustrates the process with example CFD trades.

Interested in trading CFDs with IG?

Call +61 (3) 9860 1799 or email [email protected] to talk about opening a trading account. We’re here 24 hours a day, from 4am Saturday to 10pm Friday (BST).

CFD trading steps

When you trade CFDs (contracts for difference), you buy a certain number of contracts on a market if you expect its price to rise, and sell them if you expect it to fall. But the finer details can often be a little more complicated – especially since platforms and functionality vary from provider to provider.

Here are the six steps you’ll need to follow to start CFD trading:

Learn how CFDs work

The first step towards trading CFDs is to learn how they work. There are a number of differences between CFDs and other forms of trading, and understanding these nuances can help you trade more effectively.

To get started, you can take a free online course through IG Academy or read our one-page introduction: what is CFD trading and how does it work?

Create and fund an account

Applying for a CFD trading account is a straightforward process, and usually takes just a few minutes to complete.

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Once the details you provide have been verified, you’ll need to fund your account. You can add funds via credit card or debit card.

If you’d prefer to build your market confidence in a completely risk-free environment, you can open a demo account and practise with $20,000 of virtual funds.

Build a trading plan

The next step is to build a trading plan – a comprehensive blueprint for your trading activity. Among other things, this should include your motivation, time commitment, goals, attitude to risk, available capital, markets to trade and preferred strategies.

A trading plan can help you make better decisions under pressure because it defines your ideal trade, desired profit, acceptable loss, and risk management strategies.

Find an opportunity

Once you’ve opened and funded your account, it’s time to find your first trade. With IG, you’ll be able to go long and short on over 17,000 markets, including:

With so many markets to choose from, identifying your first trade can often seem daunting. That’s why we offer a range of tools and resources to help you decide on the deal that’s right for you:

  • Spot market moves at a glance with our essential charts, and interpret what they mean using our range of technical analysis tools
  • Upgrade to our advanced ProRealTime charting package and gain access to automated dealing, as well as even more indicators. It’s free to use if you transact at least four times in a given month, otherwise there’s a $40 per month fee*
  • Respond instantly to key market moves with alerts, which can be set to trigger when the market hits a certain level or moves by a set amount
  • Learn from our team of market experts with up-to-the-minute analysis and live video, as they explore emerging patterns and trends worth watching
  • Access a real-time Reuters feed in the platform, and filter the latest news stories by market, article type and more
  • Be alerted to key trends and potential opportunities and explore concise, actionable analysis with third-party signals
  • View our economic calendar and gain a full overview of macro and microeconomic events with the potential to move markets
  • Review dedicated market data for a breakdown of trader sentiment, the latest company figures and real-time streaming prices
  • Identify shares you may want to trade with the market screener, according to company fundamentals, location, sector and more

Choose your CFD trading platform

With IG, you’ll have access to several trading platforms:

  • Web-based platform
  • Mobile trading apps
  • MetaTrader 4
  • Advanced platforms

These can all be tailored to suit your trading style and preferences, with personalised alerts, interactive charts and risk management tools.

What is CFD Trading – The Ultimate Guide

Updated on: 6 January 2020

Going into the trading market can be a bold move for someone who has no experience at all and can have pretty dire consequences at times. I should know. I have been in the trading business for over 13 years and I have had a lot of ups and downs. The bad thing was that the downs were pretty harsh and unforgiving. The good thing is that I have learned a lot from them, thus, preventing me from repeating them in the future.

In fact, this is one of the key aspects in succeeding in the trading business – never take anything for granted. Having a solid grasp of the definitions you are playing with is essential in avoiding dangerous pitfalls and minimizing the risks. So, we are going to start right at the bottom.


CFD definition and basics – CFD trading explained

What does CFD stand for?

CFD stands for Contract For Difference and it is immensely popular among traders. It is, in essence, a form of derivative trading that allows you to speculate and bet on more than just one asset’s price movement. This time you have shares, commodities, treasuries, currencies and shares to play with, along with 4 key concepts you need to learn how to control:

  • 1. The Spread
  • 2. Varying Size
  • 3. The Duration
  • 4. Financial Outcome

There is little chance of understanding how to trade CFDs without mastering these 4 notions, so let’s take them one at a time.

1. The Spread

There are 2 prices that are quoted in any contract for difference trading. One is the sell price, representing the position you open a short CFD from (I’ll explain what short means in this context) and the other is the buy price, representing the position you open a long CFD from.

The spread is the difference between those 2 prices, which is also known as market value. For a selling price of 2445 and a buying price of 2446, you have a value of 1 spread. This value of 1 also represents the cost of opening your position in the trade.

2. The varying size

Any CFD definition will state that this trading method differs according to the value of the underlying asset in question. In other words, your individual CFD trading will replicate how the asset moves on the market. It is what separates this type of trading from other trading derivatives.

Just to give you an example of how this works. Let’s say you have an asset being traded in lots of 6.000 units. The equivalent CFD will automatically have the same value. In this context, buying 600 shares translates by opening 600 CFD contracts.

3. The Duration

The key to better understanding what are CFDs in trading is to understand how they function in terms of duration. CFDs have no expiry date. You need to manually close them when you see your profits settling, by placing an opposite trade to your initial position.

Did you buy 600 contracts of asset X? You can close the trade by selling an equal amount of contracts.

4. The financial outcome

Calculating the financial plusses and minuses is both easy and important. Neglecting this aspect could get you into a lot of trouble on the long run, because this is about math and you need math to work for you not against you. The faster you get this point, the better.

And the way you do that is by multiplying your number of contracts by the value of each contract. Then the final step would be to again multiply the result by the points coming out as the difference between a sell and a buy.

Let me detail on that a bit for the newbies: You have 600 contracts, trading at 600 points for each share. This means that you have 1 contract equal to 1 share. As the asset goes up, each point taken will give you £6 as profit.

Margin and leverage? – What are those?

There is no way you haven’t heard about margin or leverage. And there is no way to skip this part of the article, because I cannot accurately answer the “What is CFD trading?” question without allowing you this useful insight in 2 of the most important trading notions there are.

The margin

The definition is simple. The margin represents your initial deposit, needed to place a trade. You will be automatically charged with a specific amount of cash (the margin) for every trade you place, aside from the commission itself. This usually confuses beginners, who think “margin” is just a fancy word for fee.

Obviously, that is false, because once your trading position is closed, the margin that has been deducted from you will be immediately returned to your account. There are no standard margin requirements you need to keep in mind. This aspect depends entirely on the market you decide to activate in.

However, and this is an important addition, you have to pay attention to the margin’s value. The higher the margin requirement is, the bigger the risks become. Which, I believe, comes natural.

Another key notion to remember is the margin close out. The margin close out refers to the event where your funds equal or drop below the value of a given open position. When that occurs, you risk all your positions being automatically closed, to protect you from snowballing downstream.

This is bad, however you would look at it. This is why you need to keep your eye on the Margin Level indicator at all times, or your broker will do that for you.

The leverage

The definition of leverage is even simpler than that of margin. In everyday words, the leverage is the ability to play with a large amount of cash without betting any of your actual funds. Or very little of them. You simply borrow the rest from the broker and the amount you get depends on the type of trade, on the market you operate in and on the broker’s policies.

It is easy. If you want to control a £100,000 position, you will only use £1,000 from your personal funds to do that. This is what you call a 100:1 leverage, because you are controlling an amount of money with 100 times less investment. If the position you are betting on goes up to £101,000, you will have doubled your investment.

The bad thing is that it goes both ways, making leverage a risky method, especially when you don’t know how to play it.

How does CFD trading work?

Although the basics are easy to understand, mastering them and evolving beyond the mere trial-and-error is harder than it seems. What most people are interested in is, mainly: what are CFDs in trading and why should I choose this trading method over anything else?

In this regard, I have to mention that Contract for Difference trading is gaining more popularity among traders all over the world for several reasons:

– Direct Market Access (DMA)

What this means is that, depending on which provider you decide to work with, you may be allowed to use equity exchanges on a global scale. This will provide you with plenty of trading markets to juggle with. Trust me, more options is always better, because you never know which will eventually pay off for you. You will also have the opportunity to choose what suits you best.

– No taboos

Here is where it gets interesting. Traditional trading only focuses on fit and powerful markets, where the assets’ movements are active and mainly positive. What is CFD trading in this context, you might ask? CFD trading, in this context, translates by ignoring the taboos.

In CFD trading there is no such thing as dead markets. You can gain profits from a falling market just as easy as you can from the more active, rising ones. It is one of the main reasons why traders tend to focus on this aspect in particular.

– Short-term trades

Not everybody has the financial boost to get rich overnight. And I would definitely advise you to avoid this seductive, but destructive idea. It is always smarter to start low and grow from there than start big and fall big. And, in most cases, irreversible.

CFDs market allows you to play safe and focus on short-term market trades, avoiding large investments that could ruin you in the blink of an eye. This financial safety option is what has attracted the most beginners I have seen and for good reasons.

– No market closure

The CFD markets are open around the clock. Aside from that, there are no strict time limits for the actual trading itself. One trade will only close when you wish it to close, giving you full control of the process. Compare that to traditional markets, which open and close at certain hours, only allowing you a strict timeframe to exploit the market’s volatility and you can see why CFDs are so appealing to so many.

It is quite simple in my book – Give me a higher degree of control and I am sold.

– Rapidity

We want faster trades, fast asset movements and faster results. This is where CFD trading truly shines. You no longer have to wait for an elusive and potentially scary outcome. Now you can go for flash-trades, delivering almost instant gains, provided that you have played your cards right.

What is CFD trading going to be like for a beginner?

Scary. It will definitely be scary, that much I can say. But here is the deal. Compared to traditional trading options, the CFD market is more malleable, in the sense that you get more options to choose from, the markets are non-stop, allowing you to focus on specific timeframes and you get a higher degree of control.

For a beginner, CFD trading is probably the best starting point. Go for low investments, always remain in control and do your homework. I am giving you this from my own experience. The hardest part about the trading is going over 2 thresholds:

  • Accumulating enough know-how
  • Accumulating enough experience and intuition

I am here to help you with the first point, but the second one is entirely up to you. Go for it!

An Introduction To CFDs

The contract for difference (CFD) offers European traders and investors an opportunity to profit from price movement without owning the underlying asset. It’s a relatively simple security calculated by the asset’s movement between trade entry and exit, computing only the price change without consideration of the asset’s underlying value.   This is accomplished through a contract between client and broker, and does not utilize any stock, forex, commodity or futures exchange. Trading CFDs offer several major advantages that have increased the instruments’ enormous popularity in the past decade.

How a CFD Works

If a stock has an ask price of $25.26 and the trader buys 100 shares, the cost of the transaction is $2,526 plus commission and fees. This trade requires at least $1,263 in free cash at a traditional broker in a 50% margin account, while a CFD broker formerly required just a 5% margin, or $126.30. A CFD trade will show a loss equal to the size of the spread at the time of the transaction so, if the spread is 5 cents, the stock needs to gain 5 cents for the position to hit the breakeven price. You’ll see a 5-cent gain if you owned the stock outright but would have paid a commission and incurred a larger capital outlay.

If the stock rallies to a bid price of $25.76 in a traditional broker account, it can be sold for a $50 gain or $50/$1263 = 3.95% profit. However, when the national exchange reaches this price, the CFD bid price may only be $25.74. The CFD profit will be lower because the trader must exit at the bid price and the spread is larger than on the regular market. In this example, the CFD trader earns an estimated $48 or $48/$126.30 = 38% return on investment. The CFD broker may also require the trader to buy at a higher initial price, $25.28 for example. Even so, the $46 to $48 earned on the CFD trade denotes a net profit, while the $50 profit from owning the stock outright doesn’t include commissions or other fees, putting more money in the CFD trader’s pocket.

Best Binary Options Brokers 2020:

    Best Binary Options Broker 2020!
    Ideal for beginners!
    Free Demo Account + Free Trading Education!
    Get a Sign-up Bonus:


    2nd place in the ranking!

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