What are CFDs?
Contracts for difference (CFDs), like spread bets, are an accessible way to trade on the prices of financial instruments such as shares, indices and commodities.
Unlike when buying shares, when you trade CFDs you don’t physically own the underlying instrument. That means you don’t have to pay the associated costs of physical ownership such as account management fees, commissions and stamp duty. The tax treatment of profits made through CFD trading depends on the individual circumstances of each customer. Tax law can change and may differ in a jurisdiction other than the Republic of Ireland.
CFDs allow you to trade on whether the price of a financial instrument is likely to go up in value (going long) or go down (going short). With CFD trading you can profit from rising or falling markets.
For example, imagine a major oil company has just forecast a record profit and you think the share price will go up. You decide to buy 1000 CFDs at 1950 cents. If the price moved up, say from 1950 to 1990 cents, you would have made a profit of 40 cents per CFD owned. With 1000 CFDs, that would equate to €400. However, if the price dropped by 40 cents, you would lose €400 instead. Click here to see a more detailed example of a CFD trade.
Buying in a rising market
If you buy a financial instrument that you believe will rise in value, and in due course your prediction is correct, you can sell the instrument for a profit. However, if you are incorrect and the value falls, you will make a loss.
Selling in a falling market
If you sell a financial instrument that you believe will fall in value and your prediction turns out to be correct, you can buy the instrument back at a lower price, for a profit. If you are incorrect and the value rises, you will make a loss. Example of a CFD trade.
Trading on margin
CFDs are a leveraged product, which means that you are only required to deposit a fraction of the overall value of the trade to open the position. Margins with CMC Markets usually vary between 1% and 20%. Margin enables you to magnify your return on investment because, with a relatively small investment, you can control a much larger position. However, losses will also be magnified so you should always use our risk management tools, such as stop losses or take profit orders, to control your risk.
The spread
CFD prices are quoted in pairs. The sell price is quoted first and the buy price is quoted second. The spread is the difference between the sell and the buy price. If you think the price is going to go down, you use the sell price. If you think it will go up, you use the buy price. To close out your position, you use the close out function which in effect enters into an opposite trade. For example, If you were viewing the UK100 price, it might look like this:
UK 100 4500 / 4502
Buy at 4502 if you think UK100 will rise in value.
Sell at 4500 if you think UK100 will fall in value.