What is a CFD?
Price Exposure Without Owning the Underlying Asset
A Contract for Difference (CFD) is a financial derivative based on the price movement of an underlying financial instrument.
When trading a CFD, you do not purchase or take ownership of the underlying asset. The result is based on the difference between the opening and closing prices, together with position size and applicable trading costs.
CFDs can provide exposure to currencies, stocks, indices, metals, commodities and selected digital assets.
How CFD trading works
From Market Selection to the Final Result
A CFD follows the price movement of its underlying market. A trader selects a market, direction and position size, then closes the position after the market moves.
Long Position
P/L = (Closing Price − Opening Price) × Position SizeShort Position
P/L = (Opening Price − Closing Price) × Position SizeSpreads, commissions, overnight financing and other applicable costs can also affect the actual result.
Position direction
Going Long and Going Short with CFDs
Long Position
Opened when a trader expects the underlying price to rise. A rise may generate a gain; a fall may generate a loss.
Short Position
Opened when a trader expects the underlying price to fall. A fall may generate a gain; a rise may generate a loss.
Being able to trade in either direction does not reduce risk. Prices can move against a position whether it is long or short.
Leverage and margin
Exposure Can Exceed the Margin Required
Leverage allows a trader to control a position whose total exposure is larger than the margin required to open it. With leverage of 1:100, a simplified $10,000 position would require $100 of margin.
Using Leverage
Required Margin = Position Value ÷ Leverage$10,000 ÷ 100 = $100
Using a Margin Requirement
Required Margin = Position Value × Margin Requirement$10,000 × 1% = $100
Profit and loss are influenced by the full position exposure, not simply the margin deposited. Leverage can therefore increase both potential gains and potential losses.
Margin is the amount required to open or maintain a leveraged position. It is not the purchase price of the underlying asset. Requirements vary by instrument, leverage, position size and applicable conditions.
Examples are educational only. Actual leverage and margin requirements depend on the instrument, account and trading conditions.
Account margin
Used Margin, Free Margin and Margin Level
Used Margin
The amount currently allocated to support open positions.
Free Margin
The remaining equity that is not currently being used as margin.
Margin Call
Can occur when account equity falls relative to the margin needed to maintain open positions.
Stop Out
One or more positions may be closed automatically when a specified margin level is reached.
Margin Level
Margin Level (%) = Equity ÷ Used Margin × 100Open-position gains and losses change equity and can therefore change the account's margin level.
Margin-call and stop-out mechanisms manage exposure but do not guarantee that losses will be limited under every market condition. Exact levels depend on confirmed CFD First account and trading conditions.
Position size and trading costs
Understand Both Exposure and Applicable Charges
Position size determines the amount of exposure associated with a CFD. Depending on the instrument, it may be expressed in lots, contracts, units or another quantity. A larger position makes each market movement more significant to the trade's value.
Spread
The difference between bid and ask. It can form part of the cost of opening a position.
Commission
A separate charge that may apply to certain accounts or instruments in addition to the spread.
Overnight Financing
A swap-related debit or, in some circumstances, credit that may apply beyond rollover time.
A simplified CFD trade
The Same Position Can Produce a Gain or Loss
Consider a long position opened at $100 with a size of 10 units.
Market Rises to $105
($105 − $100) × 10 = $50Simplified result before applicable costs.
Market Falls to $95
($95 − $100) × 10 = −$50The same exposure produces a loss when price moves against the position.
This example excludes spreads, commission, financing, currency conversion and other applicable costs.
Markets Available Through CFDs
Forex
Price movements between currencies.
Stocks
Selected company-share prices.
Indices
Groups of stocks represented by an index.
Metals
Markets such as gold and silver.
Commodities
Crude oil and other available products.
Crypto CFDs
Selected digital assets without direct ownership.
Understanding CFD risk
Leverage Magnifies Market Exposure
CFDs are leveraged financial products and involve significant risk. Relatively small market movements can have a significant effect on a position. Volatility, economic announcements and unexpected events can affect execution prices, spreads and open-position values.
Understanding position size, leverage, margin and total exposure is essential. Risk-management tools can help structure exposure, but no tool or strategy eliminates trading risk.