Benefits of CFD trading explained

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What is CFD trading?

CFD trading is a form of derivative trading. Instead of buying or selling the underlying asset, you enter into a contract with a provider to exchange the difference in price between the point you open the position and the point you close it.

If the market moves in your favour, the contract shows a profit; if it moves against you, it shows a loss. Profits and losses are calculated on the full exposure of the position, not just the margin you’ve deposited. Leverage amplifies both potential gains and potential losses.

How CFDs work

When you place a CFD trade, you choose the market, the direction of your trade and the size of your position. The provider quotes a buy (offer) price and a sell (bid) price, with the difference between them forming the spread, which is one of the main trading costs.

Your profit or loss is based on how many points the market moves between your entry and exit, multiplied by your position size, after considering costs.

In a long position, rising prices generate profits and falling prices generate losses. In a short position, the opposite applies.

Key takeaways

CFDs can be summarised as follows:

• They’re derivatives: you trade on price movements rather than owning the asset.
• They’re leveraged: you only pay a fraction of the full exposure as margin, but profits and losses are based on the full position size.
• They’re regulated: retail leverage limits, margin-close-out rules and negative balance protection apply in many jurisdictions.
• They carry a high risk of loss: a relatively small market move can have a large impact on your account because leverage magnifies outcomes in both directions.

Why trade CFDs?

CFDs are used by different types of traders for various reasons, including the ability to go long or short, and the flexibility to trade multiple asset classes from a single account. They’re also used for hedging existing portfolios.

Going long or short

CFDs allow you to speculate on both rising and falling prices by going long or short. Short positions do not require borrowing the underlying asset, which simplifies the process, but both long and short positions carry market risk and involve trading costs.

Efficient use of capital

Because you only deposit margin rather than the full value of the trade, CFDs can free up capital for other uses. This flexibility can help you manage overall exposure, although it also increases the importance of managing risk and monitoring margin requirements.

Diversification across global markets

A CFD trading account can provide access to thousands of markets, including indices, shares, commodities, cryptocurrencies, and forex. These markets behave differently across economic and geopolitical environments, so understanding their characteristics can help you trade them more effectively.

Key advantages of CFD trading

Potential CFD trading benefits include the ability to trade without owning the underlying asset, access to direct market access (DMA) on some products, and the flexibility to hedge existing portfolios.

Trade on price movements, not ownership

CFDs let you trade price changes without taking delivery of the underlying asset. You don’t need to arrange custody for shares, store physical commodities or manage settlement processes.

Access to DMA (direct market access)

Some providers offer direct market access (DMA) on certain instruments, typically large-cap shares or major indices. With DMA, you can see the underlying exchange order book and place orders at specific price levels. This may give more granular control over execution but can involve additional complexity and costs.

Portfolio hedging with CFDs

CFDs can also be used to hedge. For example, if you hold a portfolio of UK shares but are concerned about short-term downside, you could open a short CFD position on a UK index. Losses on the shares may then be partly offset by gains on the CFD, before costs. This doesn’t remove risk but can help adjust overall exposure.

24-hour market availability

Many CFD markets, particularly major indices and forex, are available on a near 24-hour basis during the trading week, although spreads and liquidity may vary outside core hours.

CFDs vs traditional investing

Comparing CFDs with traditional investing can help clarify how each approach works and when they may be used differently. The tables below summarise the key distinctions while keeping the narrative clear and accessible.

Ownership vs speculation

CFDs and traditional share investing differ significantly in terms of rights, responsibilities and how you gain or lose exposure.

Traditional investing gives you ownership, while CFD trading focuses solely on price movement through a derivative contract.

Liquidity and trade execution

CFD platforms and traditional exchanges offer different execution models, each with advantages and limitations.

Execution quality depends on market conditions in both cases, and spreads or slippage may widen during periods of low liquidity or high volatility.

Leverage and margin explained

Understanding leverage and margin is central to understanding the risks of CFD trading.

What is leverage in CFD trading?

Leverage lets you use a smaller deposit (margin) to control a larger position. Margin requirements vary by asset class and reflect volatility and regulatory limits. However, leverage amplifies both your profits and your losses.

How margin works

There are two main types of margin:

• Initial margin – the amount required to open a position
• Maintenance margin – the minimum equity required to keep the position open

If your account equity (cash plus unrealised P&L) falls towards the maintenance margin level, you may receive margin warnings. If it falls below the provider’s close-out threshold, positions may be closed automatically to limit further losses.

Managing risk with leverage

Leverage means even small price movements can result in large gains or losses relative to your deposit. Many regulators require negative balance protection for retail clients, which limits losses to the funds in the relevant CFD account.

However, you can still lose all the money you deposit, and risk management remains essential. Common tools include:

• Stop-loss orders*
• Take-profit orders
• Position-sizing based on a percentage of account equity
• Diversification across instruments rather than concentration in a single trade

*Standard stop-loss orders are not guaranteed. Guaranteed stop-loss orders (GSLOs) incur a fee if activated.

These tools can help structure risk but won’t prevent losses in all situations, especially during fast or gapping markets.

Short selling with CFDs

CFDs also provide a way to take a view on falling markets without borrowing stock.

How shorting works in CFD trading

Short selling with CFDs involves opening a sell position in a market you think may fall. You don’t borrow the asset. Instead, you:

• Open a CFD by selling at the current sell price
• Close the CFD by buying at a later buy price

If the market has fallen, the difference between the opening and closing prices is your gross profit before costs. If it has risen, the difference is your loss, calculated on the full exposure of the position.

Why short selling is often simpler with CFDs

Traditional short selling can involve stock borrowing, recall risk and stock-borrowing fees. With CFDs, these operational steps are handled within the platform, but you still face market risk, spreads, funding costs and any relevant fees.

CFD market access

CFDs can provide broad access to global markets from a single account, allowing you to trade different asset classes without needing separate platforms or providers.

Trade multiple asset classes

Most CFD platforms offer access to a wide range of underlying markets from a single account, including:

• Indices (for example, UK 100, US 500, EU indices and emerging market benchmarks)
• Individual shares and ETFs from various exchanges
• Commodities such as oil, gold, natural gas and agricultural contracts
• Forex pairs, including majors, minors and some exotics
• Cryptocurrencies and related products, where permitted by local regulation

This breadth enables cross-asset strategies, such as trading relationships between indices and currencies, or commodities and producer equities, although these strategies still carry risk and require an understanding of how different markets behave.

Cross-market opportunities

Some traders look at correlations between markets. For example:

• Equity indices and volatility indices
• Commodity producers and the underlying commodity
• Currencies and local equity indices

CFDs can be used to express views on these relationships, for instance by going long one market and short another. Correlations can change over time, so they’re not guaranteed and need to be monitored, and shifts in macroeconomic conditions can affect how closely markets move together.

Trading costs and profit calculation

Costs are a key part of CFD trading and can materially affect net results.

Understanding CFD costs

CFD trading usually involves spreads, commissions on some products, overnight funding for positions held past the daily cut-off, and currency conversion costs where applicable. Funding rates usually depend on a reference interest rate plus or minus a charge and may differ for long and short positions.

Comparing CFD costs vs traditional trading

Compared with traditional investing, CFDs often have lower upfront cash requirements and, in some jurisdictions, no stamp duty on share CFDs. However, traditional investing generally doesn’t involve overnight funding costs and may be more suitable for longer-term holding. Learn more about CFD trading vs investing.

How CFD profit and loss is calculated

The basic profit and loss calculation is:

The net result depends on spreads, funding and any commissions over the life of the trade.

Strategic advantages of CFDs

CFDs can be used in different ways depending on your objectives, time horizon and approach to risk.

Practical applications for retail traders

Combining CFDs with traditional portfolios

You may wish to use CFDs alongside a longer-term investment portfolio to:

• Hedge risk around specific events (for example, company earnings or macro data).
• Adjust exposure quickly without changing the underlying portfolio.
• Gain short-term exposure to markets that aren’t held directly in the core portfolio.

These techniques can help balance risk, but they don’t guarantee protection or prevent losses, as the relationship between markets can change.

Using demo accounts to practise

Most CFD providers offer demo accounts with virtual funds. These can be used to:

• Explore platform features and order types.
• Understand how margin and leverage work in practice.
• Test strategies without financial risk.

Demo trading won’t replicate all aspects of live trading (for example, emotional pressure or real-market slippage), but it can be a useful way to learn how CFDs behave, especially before opening real positions.

Step-by-step: how to start CFD trading

A typical process might include:

• 1. Check regulation:Ensure the provider is authorised by a recognised regulator, such as the FCA, ASIC or an EU authority.
• 2. Open an account:Complete registration and identity checks and, where required, the provider’s suitability assessment.
• 3. Fund the account:Deposit an amount that fits your own risk tolerance.
• 4. Learn the platform:Explore order tickets, charts and risk-management tools, using a demo or small trades.
• 5. Choose a market and direction:Based on your own research and objectives.
• 6. Set risk parameters:For example, stop-loss, take-profit and suitable position sizing.
• 7. Monitor and review:Track positions and costs, and review outcomes to refine your approach.

None of these steps guarantees profit, but they outline how CFD trading is commonly accessed and managed, and where planning and risk awareness play a role.

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