What is CFD trading and how does it work?

3 CFD trading essentials

CFD trading is leveraged

Leverage in CFD trading enables you to get full market exposure for a small initial deposit, known as margin. In other words, you only have to put up a percentage of the cost of the position as a margin, to gain exposure to the full value of the trade.

It’s important to remember that potential profits and loss will be magnified, as it will be calculated on the full size of your position – not just the margin.

For example, if you want to open a CFD trade on 50 Tesla shares, with the share price at $800 per share, you’ll only require $8000 to get exposure to a $40,000 position. That’s because your initial margin would only be 20% of the total of $40,000 trade value ($8000). But remember, your profits or losses will be calculated on the full $40,000 value of the position, not the $8000 margin.

Learn more about our CFD margin rates

Is CFD trading right for me?

Trading CFDs could be right for you if you’re looking for a way to trade rising or falling markets, and if you want to open a position using margin. However, CFD trading is risky and you could make a loss greater than your initial deposit amount.

If you prefer to buy and own financial assets, stock trading could be more suited to you.

We offer a free demo account to all traders looking to practise their trades before opening a live account. We also give you access to IG Academy – our education tool for traders.

Find out how CFDs work

CFDs work by mimicking the underlying market. So, while you can mimic a traditional trade that profits as a market rises in price, you can also open a CFD position that will profit as the underlying market decreases in price.

Say, for example, that you buy 5 contracts when the asset buy price is 7500. A single contract is equal to a $10 per point, so for each point of upward movement you'd make $50 and for each point of downward movement you would lose $50 (5 contracts multiplied by $10).

As always, possible profits and losses will be magnified because these will be based on the full 7500 position, not the margin amount.

If you sell when the asset is trading at 7505, your profit would be $250

$250 = (5 x 10) x (7505 - 7500)

If you sell when the asset is trading at 7497, your loss would be $150

-150 = (5 x 10) x (7497.0 - 7500.0)

Note that these profits and losses exclude costs and charges. These could be overnight funding charges, commission or guaranteed stop fees.

Learn how CFD profit and loss works

To calculate the profit or loss earned from a CFD trade, multiply the deal size of your position (the total number of contracts) by the value of each contract. Then, multiply that figure by the difference in points between the price when you opened the trade and the price when you closed it.

Find out how to place a CFD trade

When you’ve decided which market you want to trade, you’re ready to place a deal. If you think the value of the asset you’re trading will fall, you’d ‘sell’ (go short); if you think it will climb, you’d ‘buy’ (go long). Learn more about how to place a CFD trade.

You can monitor all your open positions on the trading platform, and close them by clicking the ‘close’ button. If you opened your position by buying, you could close by selling the same number of contracts at the sell price – and vice versa.