What is CFD Trading?

How does a CFD Trading work?

Once you choose a financial instrument you wish to trade, you have to select whether to ‘buy’ or ‘sell’ the instrument. If you think the value of the instrument will increase, then you buy the CFD. If you think the price will fall, you sell the CFD.

To close your CFD you simply place the offsetting CFD trade, so if you bought the CFD, you would sell the CFD to close the trade. The more the CFD price moves in your direction the greater the profit you will generate, adversely, the more the CFD price moves against your direction the greater the loss the will be.

Is CFD trading suitable for everyone?

No. You should only trade CFDs if you have capital you can afford to risk. They expose you to leverage, so the level of risk is far higher than traditional trading - the rate at which you can generate profits and losses is vastly accelerated.

Before trading CFDs you should learn about the instruments you wish to trade and familiarise yourself with the trading platform via a demo environment. It’s also advisable to have a risk management strategy in place, such as applying stop and limit orders to every trade you place.

For more experienced traders, CFDs are a useful tool for hedging exposure - for example, hedging a share portfolio in a falling equity market scenario. Because they aren’t as capital intensive as traditional trading methods, they tend to be popular instruments for more experienced clients.