CFD Trading Guide

Contracts for difference (CFDs)

CFDs are derivative contracts that enable traders to take advantage of short-term changes in an asset’s price without owning the asset itself. Traders can take a position in a financial instrument, ‘buying’ if they think the price will rise or ‘selling’ if they believe it will fall, while only putting down a small percentage of the value of their trade as security – known as trading on margin.

Quantity

CFDs are traded in standardised contracts (lots). The size of an individual contract varies depending on the underlying asset being traded, often mimicking how that asset is traded on the market. For equity CFDs, the contract size represents one share in the company you’re trading. So to open a position that mimics buying 500 shares of Apple, you’d buy 500 Apple CFD contracts. This is one way in which CFD trading is more similar to traditional trading than other derivatives like options.

Order type

For equity CFDs, the price matches the price in the underlying market.

• The buy price (or offer price) is the price at which you can open a long CFD

• The sell price (or bid price) is the price at which you can open a short CFD

Sell prices will always be slightly lower than the current market price, and buy prices will be slightly higher. The difference between the two prices is known as the spread.

Exposure

Exposure is a general term that refers to the total market value of a position and the total amount of possible risk at any given point which is the amount of capital that you stand to lose when you invest in an asset, otherwise known as risk. When investing, financial exposure is limited to the amount that you spend on opening a position – for example if you were to purchase shares which become completely worthless, you would only lose the amount you paid.

When trading with CFDs, your exposure is limited by the stop loss but keep in mind that when trading with leverage your exposure can increase because your capital is amplified beyond the initial outlay, known as your margin (deposit). In these cases, your profit and loss can be magnified.

Expiry

All orders are sent as Fill or kill. If the order can't be filled in full immediately, it will be cancelled.

Stop loss

When you open your position, you’ll manually set your stop-loss order parameters. If the market moves against you once your position is opened, your stop order is automatically triggered when the price is reached that you’ve set as your stop amount. At this point, the trade is automatically closed to limit further loss. A stop loss is mandatory for all strategies so this limits exposure.

Duration

CFD trades have no fixed expiry so traders close a position by placing a trade opposite to the one they opened with. You would close a ‘buy’ position of 10 Microsoft contracts, for instance, by ‘selling’ 10 Microsoft contracts. If you keep a daily CFD position open past the daily cut-off time (typically 10pm UK time, although this may vary for international markets), you’ll be charged an overnight funding fee. This amount reflects the cost of the capital your provider has, in effect, lent you to open a leveraged trade.