CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 

27.2% of retail investor accounts lose money when trading CFDs with this provider.

You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Education divider Contract for Difference

Contract for Difference (CFD)

What is CFD Trading?

A Contract for Difference (CFD) is a financial instrument that allows traders to speculate on price movements of various assets without actually owning the asset itself. In a CFD, the buyer and the seller agree that the buyer will pay the difference between the asset’s price at the time the contract is opened and its price when the contract is closed. Traders prefer CFDs because they allow them to profit from price movements—whether the price goes up or down—without dealing with the complexities of owning the underlying asset.

CFD trading occurs directly with a CFD broker, and no exchange is involved. The rising popularity of CFDs is linked to the unique advantages they offer.

How Does CFD Trading Work?

CFD trading involves speculating on the price changes of an asset. Traders enter into contracts with a CFD broker, such as OP Trade, to potentially profit when the asset’s price rises (long position) or falls (short position). If the trader’s prediction is correct, they receive the profit when the contract is closed. However, if the price moves against them, they incur a loss and must pay the price difference to the broker.

How to Trade CFDs?

Trading CFDs involves a learning curve. Let’s break it down with an example:

Suppose a stock has an ask price of $50.52, and the trader wants to buy 100 shares. In a traditional trade, they would need $5,052 to buy those shares. However, with CFDs, the trader might only need to provide a 5% margin, or $252.60.

When the CFD position is opened, the initial loss is equal to the bid-ask spread. If the spread is $0.05, the stock must rise (or fall if it's a short position) by $0.05 just to break even.

If the stock rises to $51.52, the traditional account could sell the lot for a $100 profit (a 2% return). In contrast, with CFDs, the bid price might only reach $51.50, resulting in a $93 profit due to the spread. However, since only 5% margin was used to open the CFD position, the return is 36.8%, much higher than in traditional trading.

Advantages of CFD Trading

CFD trading offers several benefits compared to traditional trading methods:

  • Higher Leverage - European traders are generally limited to 30:1 leverage, but professional traders or those outside the EU can access up to 400:1 leverage. Keep in mind that while high leverage can increase profits, it also magnifies losses.
  • No Shorting Restrictions - Some markets restrict short selling, but CFDs allow traders to go short anytime, without limitations.
  • No Day Trading Limits - Many markets impose minimum capital requirements for day trading. With CFDs, there are no such restrictions, allowing traders to buy and sell as much as they like.
  • Access to Global Assets - CFD brokers offer access to various asset classes, such as stocks, indices, commodities, and currencies (including cryptocurrencies), all on one platform.
  • Professional Execution Without Commissions - Traditional brokers often charge commissions on trades, but CFD brokers make their profits from the spread, usually without extra fees or commissions.

Disadvantages of CFD Trading

As with any financial instrument, CFD trading has its drawbacks:

  • Spread Costs - Traders must cover the spread on every trade, which can make it harder to profit from small price movements.
  • Increased Risk - The leverage in CFD trading can lead to substantial losses, particularly for traders unfamiliar with risk management. Other risks include execution risks in fast-moving markets, as well as liquidity and margin risks, which can catch some traders off guard.