What are Contracts for Difference (CFDs) ?
What markets can you trade ?
CFD are derivatives that enable you to trade the price movements (long or short) of many assets (stocks, forex, commodities, bonds, bitcoin, …) without ever having to buy these assets.
What is leverage, or margin?
Leverage (or margin) is the ability, when you want to trade an asset, to only deposit a fraction of the cost of that asset on your account.
By allowing you to trade positions without requiring you to mobilize the capital they would theoretically require, CFDs enable you to boost your returns, but it will also magnify your losses.
The idea is that returns or losses will be based on the full value of a position while you will only have mobilized a fraction of it to open your trade.
How do CFDs work ?
With CFDs you will buy or sell a number of units for the particular asset you have decided to trade, depending on whether you think price will go up or down.
For every point variation of that asset, your gains (or losses) will be multiplied due to leverage.
Trading CFDs usually has several cost components:
- Spread: difference between the buy and sell price
- For shares, commissions on every buy / sell operation
- Holding costs : your broker will charge (or credit) your account with overnight holding costs
If you want to see a concrete example of a CFD trade on a specific stock, see my detailed CFD Trading Example.
So, that’s it for an introduction to CFDs, a powerful trading tool that needs to be used with great care but can produce outsized returns.