Contracts for Difference (CFDs) allow traders to speculate on the price movement of financial assets without owning the underlying instrument. From shares and indices to commodities, forex pairs, and stocks, CFD trading provides access to a diverse range of markets — all from a single trading platform.
In this guide to trading CFD for beginners, we explain how to trade CFDs and bring each concept to life with a practical CFD example. Here’s the thing: CFD trading isn’t just about when to buy or sell— it’s about understanding margin, leverage, and volatility. By the end, you’ll grasp the mechanics, opportunities, and risks involved in trading CFDs.
Key Points
- CFDs enable traders to take long or short positions on a wide range of markets without owning the underlying asset.
- Leverage in CFD trading can magnify both gains and losses, making risk management essential.
- Understanding factors like margin requirements, market volatility, and overnight financing costs is key to trading CFDs responsibly.
What is CFD Trading?
CFD trading is a way to speculate on the price movements of financial assets — such as shares, commodities, indices, bonds, or currencies — without actually owning them.
Here’s how it works: you enter an agreement with a broker to exchange the difference in an asset’s price between the time you open a trade and when you close it.
- If the price moves according to your prediction, you earn a profit.
- If it moves against you, you incur a loss.
This form of trading with CFDs gives you the flexibility to trade both rising and falling markets. However, because they often involve leverage, which amplifies both potential gains and losses, it’s important to fully understand how they work and practise sound risk management before trading.
Why Trade CFDs?
CFDs offer unique advantages, including the ability to generate potential returns from both rising and falling prices, leverage your position, hedging capabilities, and access to a wide range of markets through derivatives.
Flexibility: Trade in Rising and Falling Markets
One of the main advantages of trading with CFDs is the ability to seek opportunities in both rising and falling markets. When anticipating an increase in prices, you can take a position to go long (buy) and benefit from the upward movement. When expecting a decline in prices, you can go short (sell) to potentially profit from the drop.
The key takeaway? This flexibility allows traders to stay active in varying market conditions, making CFDs a versatile choice for those who want to adapt their strategies as markets change.
Leverage: Control Larger Positions with Minimal Capital
How can CFDs allow you to trade larger amounts than the money you actually deposit? Through leverage. In CFD trading, your broker lets you open larger positions by putting down only a small portion of the total trade value.
If the market moves in your favor, your profits are amplified. However, if it moves against you, your losses can grow just as quickly. That’s why practising careful risk management is essential before using it.
Hedging: Protect Your Portfolio from Market Downturns
You can use CFDs to protect your investments when markets move against you. This is called hedging. It works by opening a new CFD position that moves in the opposite direction of your existing investment.
For example, if you own stocks that you expect to fall in value, you can sell a CFD on those same stocks. If the price drops, the profit from your CFD trade can help offset the losses from your stock holdings.
Derivatives: Trade Multiple Markets without Owning the Assets
CFDs are a type of derivative, which means their value comes from another asset, such as a stock, index, commodity, or currency, without the need to actually own it.
Why does this matter? It makes trading simpler, since you don’t need to handle the process of buying or holding the actual asset. With CFDs, you can access many different markets from one platform and easily diversify your portfolio across various asset types.
Expand your knowledge of key financial terms by exploring the Vantage Terminology page.
How does CFD trading work?
CFD trading is a method of derivative trading that enables traders and investors to benefit from price movements without the need to own the underlying assets.
The versatility of trading with CFDs provides access to a wide range of global markets. It allows traders to take positions based on both rising and falling market prices, offering the flexibility to buy (go long) in anticipation of market growth, or to sell (short sell) in expectation of market declines.
| Scenario | Asset Price at Open | Asset Price at Close | Result |
| Long CFD | USD1,500 | USD1,550 | Gain |
| Long CFD | USD1,500 | USD1,450 | Lost |
| Short CFD | USD1,500 | USD1,450 | Gain |
| Short CFD | USD1,500 | USD1,550 | Lost |
Table 1: Example of How Gains and Losses Are Calculated in CFD Trading
Example purposes only. Figures do not represent actual market conditions.
Types of CFDs
CFD trading covers a wide range of asset classes, giving traders access to different markets from a single platform. Explore the common types of CFDs and the markets you can access through trading CFDs with Vantage below.
Forex CFDs
Participate in the foreign exchange markets without holding the underlying currencies.
Example markets: EUR/USD, GBP/JPY, AUD/USD.
Stock CFDs
Take positions on the price movements of individual company shares listed on global exchanges.
Example markets: Apple (AAPL), Tesla (TSLA), Microsoft (MSFT).
Index CFDs
Speculate on the performance of entire stock market indices without owning the index itself.
Example markets: S&P 500, FTSE 100, ASX 200.
Bonds CFDs
Gain exposure to price changes in government or corporate bonds without owning the underlying debt instruments.
Example markets: US Treasury Bonds
ETF CFDs
Trade on the price movements of exchange-traded funds (ETFs), which track baskets of assets or sectors.
Example markets: SPDR S&P 500 ETF, iShares Gold Trust.
| CFD Type | Example Markets | Key Features |
| Commodity CFDs | Gold, silver, coffee, oil | Trade on global commodity price movements |
| Forex CFDs | EUR/USD, USD/JPY, AUD/USD | Access forex markets without holding currencies |
| Stock CFDs | Nvidia, Palantir, Alphabet | Trade share price movements without ownership |
| Index CFDs | S&P 500, FTSE 100, DAX 50 | Speculate on index performance as a whole |
| Bond CFDs | US Treasury | Exposure to government or corporate bonds |
| ETF CFDs | SPDR S&P 500 ETF, iShares Gold Trust | Trade ETFs tracking multiple asset classes |
CFD Trading Costs and Considerations
It’s important to understand the costs involved when trading CFDs, as they can directly affect your overall account balance and trading outcomes.
Spread: The Basic Cost of Each Trade
Every CFD has two quoted prices:
- The bid price is the rate at which you can sell or open a short position. It is slightly below the market price of the underlying asset.
- The offer price is what you pay to buy or open a long position. It is slightly above the market price.
The spread is the difference between these two prices [1]. It acts as the broker’s built-in cost for executing your trade and can vary depending on the asset type and market conditions.
Commissions: Fees on Specific CFD types
For most CFDs, the spread covers the cost of the trade. An exception is stock or share CFDs, where the buy and sell prices mirror the underlying market. In this case, a commission is charged instead. Commission rates vary between brokers but often average around 0.1%, making the process similar to traditional share trading.
Swap Rates: Costs for Holding Overnight Positions
Swap rates, also called overnight financing charges, apply when a position remains open after the trading day ends. These rates represent the interest cost (or credit) of holding the trade overnight. They can either add to your costs or provide a credit, depending on the direction of your position and the underlying interest rate differential.
Explore the Vantage trading calculator to see how spreads, commissions, and swap rates may affect your CFD positions.
Getting Started with CFDs
To trade CFDs, you can follow these steps:
1. Open a CFD Trading Account With a Broker of Your Choice
First, open a trading account with a broker of your choice. You can follow the procedure found on their website and you’ll be up and running in a few minutes.
Most brokers ask for your identification documents and proof of address to verify your account. Once verified, you can access all the full features of your trading account.
2. Fund Your CFD Trading Account
There are multiple ways you can fund your trading account, depending on the funding options offered by your broker. You can even fund in currencies that are not your local currency, if you prefer. For example, one way is to connect your credit/debit card directly to your trading account to fund the account.
If you’re still unsure, you can open a demo account in a risk-free environment that lets you trade without loss.
3. Create a CFD Trading Plan
A strategy is the backbone of successful trading activities. A trading plan helps you determine:
- Your trading window
- Your risk appetite
- Capital for opening leveraged positions
- Markets to trade
A trading plan helps you make calculated decisions that protect you from wiping out your account. With a plan, you make better decisions on your desired returns, acceptable loss, and risk mitigation strategies that protect your capital.
4. Download a CFD Trading Platform
After funding your trading account, the next step is to download your broker’s CFD trading platform. This platform is your primary tool for executing trades, analysing market data, and managing your investment portfolio.
Most brokers provide platforms compatible with desktops, smartphones, and tablets, allowing you to trade from anywhere at any time. Additionally, these platforms typically feature educational resources and analytical tools. These resources can help you refine your trading strategies and make well-informed decisions.
Commonly used platforms include MetaTrader 4 (MT4), MetaTrader 5 (MT5) and TradingView. You can also trade easily on your mobile with the Vantage App.
5. Open and Monitor Your First Position
Once you’ve chosen your CFD assets to trade, decide whether you want to go long or short. CFDs give you the opportunities to access both options.
There are several ways to monitor your position. Your broker can:
- Send you SMS messages
- Email alerts
- Push notifications
You can also monitor your positions directly from your trading platform.
6. Close Your First Position
Once your position moves in your favour, you can use the “close” button to exit the trade. You can also use this button to exit any losing trades and take an acceptable loss. To close a long position, you sell your CFD, while closing a short position means you buy it back.
Your broker will deduct their fees from your return on investment or your capital if you incurred a loss.
Start CFD Trading with Vantage
Vantage offers the ability to engage in leveraged trading using CFDs across various markets, including forex and commodities, all at competitive rates. As a CFD trading platform, Vantage empowers traders to capture opportunities in both rising and falling markets with ultra-tight spreads and transparency. You can trade with assurance on Vantage’s secure platform, supported by 24/7 assistance. Here, you can gain insights into market behavior, effectively manage risk, and develop a well-planned strategy before initiating your trades.
Open a live account with Vantage today.
Frequently Asked Questions (FAQs)
What does CFD mean in Trading?
CFD stands for contract for difference, which is a financial derivative allowing traders to speculate on the rising or falling prices of fast-moving global financial markets, such as shares, indices, commodities, and currencies, without owning the underlying asset.
It is an agreement between a trader and a broker to exchange the difference in the value of a particular asset from the time the contract is opened to when it is closed.
Is CFD trading suitable for beginners?
Yes, beginners can trade CFDs, but it requires a solid understanding of the markets and risks involved. Beginners can choose to start with a demo account to gain experience without financial risk and invest time in educational courses offered by brokers before trading with CFDs.
Additionally, with access to educational resources such as the Vantage Academy and a cautious approach to learning trading strategies, beginners can gradually build their understanding and skills. It is important for new traders to thoroughly research and consider their risk tolerance before diving into CFD trading.
Is CFD better than stock?
Whether CFDs are better than stocks depends on your goals, risk tolerance, and trading strategy. Here’s the thing: CFDs offer leverage, flexibility to go long or short, and access to multiple markets — advantages that traditional stock trading can’t always provide. However, keep in mind that trading with CFDs also carries higher risk, especially because leverage can magnify not only profits but also losses.
How much do you need to trade CFD?
You only need a small initial capital to start trading CFDs.
With Vantage, traders can open a live account and begin trading with a minimum deposit of just USD $50. However, the specific amount required to trade CFDs will vary based on factors such as the type of products being traded, the leverage employed, and your personal risk tolerance.
How is CFD trading different from forex trading?
CFD trading and forex trading both involve speculation on price movements and the use of leverage. The key difference lies in the range of assets available for trading: CFDs cover a broad spectrum of underlying products including stocks, indices, commodities, and more, while forex trading is specifically focused on currency pairs.
Reference
- “Spreads in Finance: The Multiple Meanings in Trading Explained – Investopedia”. https://www.investopedia.com/terms/s/spread.asp . Accessed 10 April 2024.
