What Is CFD Trading?
CFD trading involves speculating on price movements of financial assets through Contracts for Difference (CFDs), without owning the underlying asset. A CFD is a type of derivative contract between a buyer and a seller, where the profit or loss is determined by the difference between the entry price and the exit price of a given asset.
Since their introduction in the early 1990s, CFDs have gained popularity among traders thanks to their lower capital requirements.
They offer access to markets that might otherwise be out of reach due to high margin demands or regulatory constraints. CFDs also allow traders to profit from both rising (long positions) and falling (short positions) markets. In the UK, CFD trading is exempt from stamp duty, as no actual ownership of the asset takes place.
When trading CFDs, you’re predicting whether an asset’s price will rise or fall. A Buy position is taken when you expect the price to go up, and a Sell position is chosen when you anticipate a decline. It’s important to note that you’re not purchasing the asset itself — you’re trading based on its price movement.
However, if the market moves against your prediction, you could lose your investment.
Example:
Suppose you read an analysis suggesting that Apple stock is likely to drop soon. You open your trading platform, analyze real-time charts, and agree with the prediction.
What do you do — Buy or Sell?
Choosing Buy means you believe the stock price will rise above your entry point.
Choosing Sell means you expect the price to fall below your entry point.
If the asset moves even a few pips in your favor, you can make a profit. But if the market turns against you, you may incur a loss.
CFD trading can be an effective strategy for short-term traders or those looking to take advantage of market volatility. Just be aware that it carries risk, and losses are possible as well as gains.