The Agreement
- Person A believes Gold will rise from $1,175.00 per oz.
- Person B believes Gold will fall from $1,175.00 per oz.
- They enter an agreement to settle the difference from $1,175.00.
Module 02
What is CFD Trading?
Contracts for Difference let you trade the price movement of an asset — without owning it. Learn how CFDs work, the maths behind P/L, the advantages, the pitfalls, and the three main markets you can trade.
The basics
What are CFDs?
A Contract for Difference (CFD) is an agreement between two parties — the broker is the market maker, acting as buyer to anyone selling and seller to anyone buying. The seller pays the buyer the difference between the asset's opening and closing price, multiplied by the contract size.
CFDs are financial derivatives that let you take advantage of prices moving up (long positions) or down (short positions) on an underlying instrument. They're commonly used to speculate on those markets without ever owning the underlying asset.
- If the difference is negative, the buyer pays the seller.
- If the difference is positive, the seller pays the buyer.
There is…
- No restriction on the entry or exit price of a CFD.
- No time limit on when the exchange happens.
- No restriction on buying or selling first.
Worked example
A CFD trading example.
CFDs are usually traded on leverage — but to start, here's the simplest possible version.
The Outcome
- Person A buys 1 oz of Gold at $1,175.00.
- Person B sells 1 oz of Gold at $1,175.00.
- Three days later, Gold trades at $1,180.00. Person A closes at $1,180 and makes $5; Person B closes at $1,180 and loses $5.
Vs. traditional shares
Buy 500 shares at £5 — you have £2,500 of stock. Buy 500 CFDs at £5 — you also have £2,500 of exposure. If the price rises 10%, you make £250 either way. So why trade CFDs? Read on.
The maths
Profit & Loss
P/L = (Sell Price − Buy Price) × No. of CFDs
It doesn't matter if you bought or sold first — the P/L is the difference between the buying and selling price. That simple.
Profit from a falling market
With CFDs you can profit whether prices rise or fall. Open with a sell (a short position) if you think the market is falling, then buy to close at a lower price.
Sell 10 CFDs at 60.30. Market falls — buy 10 CFDs at 58.85 to close. P/L = (6030 − 5885) × 10 = 145 × 10 = $1,450.
Why trade CFDs?
The advantages.
- 01 — Profit either way
Profit either way
Long or short, rising or falling.
There's no restriction on opening with a buy or a sell. Short selling lets you sell first and buy back lower — so you can take a view on falling markets, not just rising ones.
- 02 — A world of markets
A world of markets
One account, every asset class.
You're not locked into a single asset class. Trade CFDs on Foreign Exchange (Forex / FX), Commodities, Indices, Equities and Bullion — all from the same platform.
- 03 — No stamp duty
No stamp duty
Skip the 0.5% on every share trade.
Buying shares the traditional way means paying the government 0.5% stamp duty on the value of the trade. CFDs don't attract stamp duty — so more of your capital stays in the market.
- 04 — Margin & leverage
Margin & leverage
Take a large position from a small deposit.
CFDs trade on margin: take a large position without depositing the full contract value. Leverage of up to 400:1 on FX means a $2,500 deposit can control a $1 million position — freeing your equity for other trades.
Mind the risk
The potential pitfalls of CFD trading.
Leverage works both ways. The same mechanism that magnifies profits can magnify losses, and you can lose more than your initial deposit. If you're a beginner, managing risk is the single most important skill to build — we've dedicated an entire module to it.
The markets
The 3 main market categories.
01 — Bullion Bullion
Gold & Silver — the world's safe haven.
Demand for bullion isn't only practical — it's also driven by its role as a store of value. When inflation, war or political uncertainty hit, investors flock to gold and silver because their value doesn't depend on any single government. Trading bullion via a CFD settles the price difference in cash — no physical delivery. Quoted from 23:00 Sunday to 21:00 Friday London time, with a daily break.
02 — Indices Indices
Trade the health of a whole economy.
A stock index is a basket of stocks reflecting the composite value of its components. Broad indices like the Dow Jones, S&P 500, FTSE 100, CAC 40, DAX, Nikkei 225 and Hang Seng track the general health of a national economy and are influenced by trade balance, industrial production, currency strength and political stability.
03 — Foreign Exchange Foreign Exchange
The world's largest market.
Forex is the largest market on earth, with roughly $3 trillion in currency traded every day. It exists wherever one currency is traded for another — between banks, central banks, speculators, corporations and governments. It's an OTC market, so prices are made by market makers from reputable counterparty feeds. We don't physically deliver currencies; you trade them on a contracts-for-difference basis to speculate on relative strength. Open Sunday 22:00 to Friday 22:00 London time, 24 hours.
