What is CFD trading?

Find out about how you can open Buy or Sell positions with CFDs on financial instruments such as Forex, Stocks, Commodities and Indices with Plus500.

This video demonstrates the features of trading CFDs with Plus500, including trading with leverage (i.e. opening a position with just a fraction of its total value), and low minimum deposits, as well as how to open a sell (short) position, which is just as straightforward as opening a buy (long) position.

What is a CFD?

'Contracts for difference', or just CFDs, are tradable products that follow the prices of global financial markets. A CFD allows you to obtain direct exposure to an underlying asset, for example, Gold, UK 100 or EUR/USD, without the need of owning the underlying asset. You will make gains or incur losses as a result of price movements in the underlying asset.

What are the main features of CFDs?

• In both Buy and Sell scenarios, you do not actually own the underlying asset.
• Access to leverage – you can multiply your trade size by using less capital. Up to 1:30 means that with as little as 100 € you can gain the effect of 3 000 € capital.
• Short selling is also available – opening Sell positions is just as straightforward as opening Buy positions.
• Low minimum deposit requirement – a relatively small amount of money is required to start trading stocks, forex, commodities and many more financial instruments.

What is the objective of CFD trading?

The objective of CFD trading is to speculate on the price movements of an underlying asset (generally over a short term). Your profit or loss depends on movements in the price of the underlying asset and the size of your position.

For example, if you believe the value of a stock, such as Apple, is going to increase, you can open a Buy CFD position (also known as "going long") with the intention to close the CFD position at a higher value. The difference between the price you opened and the price you closed the CFD position equates to your potential profit or loss, minus any relevant costs.

If you think the value of a stock, such as Facebook, is going to decrease, you can open a Sell CFD position (also known as "going short") at a specific price, with the intention to close it at a lower price. Your profit or loss is calculated based on the difference between these opening and closing prices.

What is leveraged trading?

Leverage is a concept that enables you to multiply your exposure to a financial instrument without committing the whole capital necessary to own the physical instrument.

When trading CFDs, you are engaging in leveraged trading, which means you don’t need to commit the full amount of capital for your trade value. For example, with a leverage of 1:10, your initial margin requirement for this particular CFD is 10%. This means you only need to deposit $100 to gain a notional exposure of $1,000.

What is margin in CFD trading?

Margin is the amount of capital that you need to have in your trading account to open and maintain your CFD position(s). These funds are required in order to cover any potential losses you may incur.

There are two main types of margin:

1. Initial Margin - to open a new position, available account equity must exceed the initial margin level requirement.
2. Maintenance Margin - to keep a position open, your available equity must exceed the maintenance margin level at all times. If the required margin level is not kept, your position(s) will be closed by a margin call regardless of its Profit & Loss (P&L).

The margin requirements vary from one financial instrument to the other, and are specified in each instrument's details.