Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

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What are CFDs?

What are CFDs?

CFDs are a way of trading on the price movements of financial markets without buying or selling the underlying asset directly.

They provide the opportunity to trade a wide range of markets including equities, indices, currencies and commodities.

CFDs can be used to speculate on upward or downward price movements, making them a flexible alternative to traditional trading.

How do CFDs work?

A CFD (Contract for Difference) is basically an agreement to exchange the difference between the opening and closing value of a contract at its close. The price of your CFD will then replicate the price of the underlying asset giving you a profit (or a loss) as the price of the underlying moves.

There are no expiry dates on CFDs, as a result you can run a position for as long as required.

CFD prices

As with traditional share dealing, CFD prices are quoted as a Bid (the price you can sell at) and an Offer (the price you can buy at). You then buy or sell a CFD based on the value of a certain amount of the underlying asset.

Margin trading

To open a CFD trade, you need to deposit only a fraction of the total trade value – which is known as the “margin”.

Margin trading enables you to increase your exposure to an underlying asset from the same initial investment.

When you use a deposit of, say just £20,000 (or equivalent currency) in your account, you can typically trade up to £100,000 worth of shares. This is a leverage factor of 5:1 or, to put it another way, a ‘margin requirement’ of 20%.

Trading CFDs on margin allows you to take large market positions in relation to the money you have deposited. Margin trading magnifies both your profits and your losses.

You must maintain your margin if the market moves against you and your deposited funds do not cover open position losses and margin requirements. This may mean sending additional funds at very short notice and/or reducing the size of your positions, which is known as a ‘margin call’.

Risk management

Many investors choose to limit their risk – or protect a running profit or open position – by placing a ‘stop-loss’ order, which closes out their position automatically once a set price level is reached.

While Atlantic highly recommends using a stop-loss, we should point out that your stop-loss might be filled at a worse price than you had requested. This ‘slippage’ can happen in fast moving market conditions, or where a share opens a trading session well away from its previous close.

No stamp duty

One key benefit of CFD trading is that you do not incur any stamp duty or need to pay safekeeping custody fees, as you are not making a physical purchase.

By the same token, you will not have any shareholder voting rights.

Hedge other investments

As CFDs offer the ability to go short as easily as long, they can be used to provide ‘insurance’ against price falls in an existing portfolio. For example, if you have a long-term portfolio that you wish to keep, but you feel that there is a short-term risk to the value of your investments, you could use CFDs to mitigate a short term loss by ‘hedging’ your position. If the value of your portfolio falls the profit in the CFDs should offset these losses.

Access to financial markets around the world

CFD trading gives you access to a wide range of markets that would not otherwise be available to retail investors. It is as easy to trade on the price movement of commodities such as oil or gold as it is to trade an individual equity. CFDs also allow you to speculate on whole indices or sectors from a single trade.

CFDs Explained

What are CFDs?

CFD Examples