How CFDs work

A Contract for Difference (CFD) is an agreement between you and your broker to exchange the difference in an asset's price between the moment you open a position and the moment you close it. You never take ownership of the underlying share, barrel of oil, ounce of gold or unit of currency — you simply receive or pay the difference in price. That single idea unlocks a great deal of flexibility.

Because a CFD merely tracks a price, one trading account can give you access to thousands of markets: forex pairs, stock indices, individual shares, commodities and cryptocurrencies, all priced and settled in your account currency. You don't need a separate brokerage for each asset class, and you don't deal with the logistics of owning the underlying instrument.

With a CFD you can profit from falling prices just as easily as rising ones. Going long means buying because you expect the price to rise. Going short means selling first because you expect the price to fall, with the intention of buying back lower. In traditional share investing, profiting from a decline is awkward and often restricted; with CFDs it is symmetrical and built in.

This two-way access is genuinely useful. It lets you trade markets that are trending downwards, and it lets you hedge — for example, holding a long-term share portfolio while shorting an index CFD to cushion a short-term decline.

CFDs are leveraged products. Rather than paying the full value of a position, you put down a fraction of it as margin while controlling the whole trade. If a broker requires 3.33% margin (equivalent to 30:1 leverage), a $100,000 position needs only $3,330 of your capital to open.

Leverage is a double-edged sword: it magnifies both gains and losses relative to the capital you commit. The same move that produces an outsized profit can produce an equally outsized loss, and if losses erode your margin too far the position may be closed automatically. This is precisely why every later module in this academy returns to risk management — leverage is a tool to be respected, not a shortcut.

Three costs typically apply. The spread or commission is the cost of entering and exiting — covered in detail in the next module. The overnight financing charge (or swap) applies when you hold a leveraged position past the daily cut-off, reflecting the cost of the borrowed exposure; it can be a credit or a debit depending on the instrument and direction. Some instruments may also incur a small adjustment around dividends or contract expiries.

A worked example helps. Buy 100 shares of a stock CFD priced at $50 — a $5,000 position. If the price rises to $52 and you close, your gross profit is $2 × 100 = $200, minus the spread or commission and any overnight financing if you held the trade across a session. The same move down to $48 would produce a $200 loss plus costs.