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What is CFD Trading

What is CFD Trading and How do CFDs work?

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What is CFD Trading and How do CFDs work?

What is CFD Trading and How do CFDs work?

The term 'CFD' stands for 'contract for difference'. A CFD creates a contract between two parties speculating on the future movement of an asset’s value (either upwards or downwards) between the time of a contract’s initiation and its close.


A trader’s profit or loss from a CFD trade is determined by the change in value of the asset in question between a contract’s start and expiration. If an asset’s price movement aligns with a trader’s prediction, profit will result. However, if the asset moves against a trader’s forecast, the trader will incur a loss.


Equity CFDs are derivative products, meaning that an investor can initiate a trade without having ownership of the asset being traded. In this way, using this form of CFDs can help to avoid transactions issues that are commonly associated with stock ownership, such as stamp duty.

CFD Trade Example

CFD Trade Example

CFD Trade Example


Say the initial price of share X is $100 and a trader chooses to exchange a CFD for 1000 of these shares. If the X’s share price increases to $105, the trader will realize a profit of $500 ($100 x 5 points of movement). However, if the price decreases to $95, the buyer will incur a loss of $500 ($100 x -5 points of movement).


Trading CFDs offers certain benefits over and above traditional forms of trading that can make the format attractive to investors. Such advantages include high leverage opportunities and the fact that CFDs do not generally have fixed expiry date. We describe these benefits in more detail below.

Leverage and CFDs

Leverage_Trading

CFDs are traded on leverage. This means that a trader only needs to place a small fraction of an asset’s market price to enter a trade. Leverage in the CFD market can start at margin requirements as low as 2%, although this can vary from asset to asset.


Leverage can hold great appeal for traders because the relatively small deposit required to enter a trade has the potential to generate large profits. However, leverage works in two directions – if an asset’s value moves against an investor’s trade direction, losses too will be amplified.


The high leverage offered with CFDs enables traders to access to securities and markets that may have previously been out of reach due to their high market prices, offering traders more opportunities and flexibility, but also the risk of greater losses.

What is the Difference Between Trading CFDs and Spread Betting?

What is the Difference Between Trading CFDs and Spread Betting?

What is the Difference Between Trading CFDs and Spread Betting?


Although CFD trading and spread betting share many similarities, each has certain benefits. CFD trading is one of the most popular ways of trading derivatives in the world – although in the UK, spread betting is more widely used. This is because spread betting is exempt from capital gains tax and stamp duty in the UK. Although CFD losses are not exempt from UK capital gains tax, losses can be offset against profits for tax deduction – which is not possible with spreadbetting.


CFDs and spread betting both offer high leverage to traders and enable investors to speculate on both the rising and falling values of securities. The low margins offered give traders the potential to make high returns, although they amplify risk at the same time.


Both forms of trading enable offer traders to benefit from stop losses and limits (attach link to relevant page). Strategically used, these are vital tools that can help a trader as they try to maximise profits and minimise losses on a trade. Traders are reminded that only certain forms of stop-loss offered by ETX Capital are guaranteed. Please contact your account relationship manager if you are unsure about the status of your stop-loss.


Importantly, unlike CFDs, spread bets have a defined expiry date. Additionally, depending on the asset being traded, CFDs can attract commission fees; by contrast, when spread betting these fees are included in the spread. Both long-term spread bets and CFDs may attract overnight trading fees.

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