What is CFD trading and how does it work?

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, share trading could be more suited to you.

We offer a 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.

Why do people trade CFDs?

• Leverage: as CFDs are leveraged products, your initial outlay is only a percentage of the value of your position
• Flexibility: because you can go long or short with CFDs, you can trade no matter which way the markets are moving
• Longer hours: you can trade some markets outside of regular trading hours. Just keep in mind that the market’s opening price may differ from its out-of-hours price
• Hedging: this offers the opportunity to offset some of your losses against profits

5 steps to becoming a CFD trader

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.

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.

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.

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).

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.

Learn about CFD timeframes

With CFDs, you can either trade the spot market or with CFD futures – depending on the market that you’re looking to take a position on.

• Spot trading (also known as cash trading) is more popular for shorter-term trading, as the spot price is the immediate real-time price of the asset. We charge an overnight funding fee for spot positions that are kept open until the next day
• CFD futures are often used for medium- to longer-term trades, as they enable you to speculate on the price that underlying asset will be on a specific date. We don’t charge overnight funding on CFD futures – making it a popular choice for those who plan to keep positions open longer than a day or two