CFD trading

CFDs work using contracts that track the live prices of financial markets. When you trade one of these contracts, you’ll exchange the difference in the market’s price from when you open your position to when you close it. You can buy CFDs to open a long position or sell them to go short.

For example, say you buy a FTSE CFD when the index is at 7100, then sell it at 7200. You’ll exchange the difference between 7100 and 7200, pocketing 100 points as profit. If the FTSE fell to 7000 instead, though, you’d lose 100 points.

Your total profit or loss is dictated by the number of contracts you buy or sell.

Learn more about how CFDs work.

To calculate CFD profits, you multiply the number of CFDs you have traded by the point value of each CFD – and multiply that figure by the number of points the underlying market has moved from when you opened your trade to when you close it.

If the underling market has moved in your chosen direction, you earn that figure as profit. If not, you make a loss.

That might sound complicated, but it becomes much simpler in an example.

Buying a single FTSE CFD will earn you £1 for every point the index rises and lose you £1 for every point it falls, which means a FTSE CFD has a point value of £1. Buy 10 FTSE CFDs, and you’ll make £10 for every point the index rises – but lose £10 for each point it falls.

If the FTSE moves from 7100 to 7200, then it has moved 100 points. You’ve bought CFDs, so you profit if the index moves up, meaning your 10 CFDs make you a profit of (100 points * £10 point value) £1000.

If you’d sold 10 CFDs instead, you’d make the same figure (£1000) as loss.

Of course, you’ll need to minus any overnight financing fees to get the net outcome from your trade.

Learn more about how to trade CFDs.

CFD margin works by only requiring you to hold a fraction of a trade’s total value in your account in order to open and maintain your position. However, your final profit and loss will still be based on the full size of your trade.

Trading £1000 of Barclays stock with CFDs, for example, might only require you to have £200 in your account as margin. But if that stock then increases to a value of £1100, you’ll make the full £100 as profit – the same as if you’d paid the full £1000. If the stock falls to £900, you still lose £100.

Essentially, in this example you’d have made £100 profit from an initial outlay of just £200, a gain of 50%. Without CFDs, you’d still have made £100, but you’d have paid £1000. Your gain would only be 10%, meaning the CFD margin has magnified your profits.

However, exactly the same effect applies to losses – which is why risk management is a key part of CFD trading.

Find out more about how margin works in CFDs.