CFDs are financial instruments that allow you to speculate on various financial markets without actually buying or selling the underlying asset. When CFD trading you are buying or selling a contract, which means you agree to exchange the difference between the opening and closing price.
What does CFD stand for?
CFD stands for Contracts for Difference.
There are two prices to look for in a CFD trade: buy price and sell price. Which one you choose will depend on whether you think the price will rise or fall.
Long position: A long position takes place when a trader places a BUY trade. Here, the trader expects the asset value will rise over time. The trader will BUY at a low price but SELL once the price rises.
Short position: A short position happens when the trader feels there will be a decline in the value of the asset and selects a SELL position. However, the trader intends to buy the contract back at a later stage if the value of the asset increases, thereby potentially profiting or losing from the entire exchange.
CFD trading is speculating on the rising or falling prices of global financial markets – such as indices, commodities, shares or cryptocurrencies*. A CFD trade is a contract between an investor and a broker to settle on the difference in the value of a financial asset or instrument for the duration of the contract.
At the time of closing the contract (a trade), if the price is higher than the opening price, there will be a positive return for the buyer. The seller has to pay the buyer, the difference, and that will be the buyer’s profit. The opposite is true if the trade price is lower than the opening price and the buyer will suffer a loss.
Find out more about how you can trade CFDs online.
*Cryptocurrency CFDs can only be traded by Professional Clients due to FCA regulations.
Axi provides access to a wide range of markets, featuring 150+ instruments to trade as CFDs. Whether you’re trading for the first time or looking for new ways to diversify your investment portfolio, there are many types of CFDs that can open a world of opportunities. The financial assets you can trade as a contract for difference include:
Example trading Gold CFDs
You see that GOLD.fs is currently priced at USD$1,720.15, and you speculate that its value will increase. To make a profit, you would open a ‘long’ position on the CFD at the current buy price. At the time of contract closing the price of GOLD.fs has risen to USD$1,801.32, and the CFD position has earned profit! If the price had decreased below the initial buy price, you would have suffered a loss.
Example trading Share CFDs
After Meta posted disappointed earnings, you are becoming convinced that the company is overvalued and that this is the beginning of a deeper correction instead of a temporary sell-off. You short Meta at $250. If the stock price of Meta continues to slide, your trade will show a profit. However, if the price of Meta rebounds and rises back above $250, you would be facing a loss on your position.
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*Cryptocurrency CFDs can only be traded by Professional Clients due to FCA regulations.
Leverage is a loan provided to traders that makes it possible for them to buy and sell financial instruments with less capital than they have. Axi offers up to 400:1 leverage for Professional clients and retail clients have a fixed leverage of 30:1.
Retail clients are covered by Negative Balance Protection which stops them from losing more than their account balance, however Professional clients are not covered and therefore can lose more than their deposit. In general, the greater the leverage, the higher the potential returns but the higher the potential losses may be.
Learn more about how leverage is used in trading.
The date post which the CFD contract matures is the CFD contract rollover date. A futures contract's expiration date serves as the last day you can trade that particular contract.
Before contract expiration, a futures trader has three options: offsetting or liquidating the position, settlement or rollover. A rollover is when a trader moves their position from the front-month contract (close to the expiration date) to another contract date further in the future, to avoid the costs or obligations associated with the settlement of the contracts. Contract rollovers are profit neutral.
Note: A CFD contract rollover date is not applicable to all trading products.
Flexibility as you can go both long and short
Leverage which allows you to get a much larger exposure to the market you are trading
Extended trading hours for some products
Suitable for short-term trading
CFDs can be used to hedge against losses from other assets in your portfolio
Leverage is a double-edged sword - the higher the leverage, the higher the risk
When trading CFDs, you never own the underlying asset
Extended trading hours for some products
Certain countries do not allow CFD trading. If you cannot find your country of residence listed on our online application form, it means that we will be unable to grant you a trading account.
As with any financial instrument, trading CFDs comes with risk. Using leverage can make CFDs riskier than non-leveraged products such as physical shares. Before you start trading on a live account, you should make yourself familiar with those products, practice in a risk-free demo environment and learn about risk management.
Retails clients have a fixed leverage ratio of 30:1, while Professional clients may have up to 400:1. Learn how you can use position sizing techniques to manage your risk.
Options share some of the characteristics of CFDs. They can provide leverage, flexibility and can be used for both hedging and speculation. However, there are some major differences. When buying a CFD, you agree to exchange the difference in price from when you opened the trade to when you closed it. Options give a trader the right (but not the obligation) to buy or sell an asset at a certain price in the future.
Options generally offer more flexibility and traders can create complex strategies using these instruments.
A CFD represents the price movement of an asset and the investor gets a clear picture of the value changes that happen during the duration of holding the position open.
When a trader agrees to a futures contract, they agree to buy or sell the underlying asset at a determined price and date in the future. It is a contract that will be executed in the future and the set price will stay unchanged, irrespective of the value movement of the asset. The buyer of a futures contract has to compulsorily execute the underlying asset when the contract expires. Consequently, the seller of the contract/deal has the obligation to provide the asset at the decided date.
Futures operate on prices established by the markets as they are traded on exchanges. On the other hand, CFDs work on prices established by the broker. Thus, the integrity of price is expected to be higher in the case of futures, when compared with CFDs.
Simply put, futures can be considered a less flexible and more structured alternative to CFDs.
Share CFDs allow you to utilise leverage when trading the movement of stock prices, meaning you can make higher profits with a smaller amount of capital. While this can increase returns, it also increases risk of loss.
Trading share CFDs allows flexibility; you can go long (buy) when you expect prices to go up or go short (sell) in order to profit from falling stock prices. Remember you are also at risk of a loss if the price goes the opposite way.
However, with CFDs you will not have any voting rights, and the tax liabilities might differ from physical shares, depending on your country of residence.
