Contracts for Difference — commonly known as CFDs — are a popular way to speculate on financial markets without owning the underlying asset. They’re used by traders who want to take advantage of rising or falling prices, often with the help of leverage.
But what exactly are CFDs, how do they work, and what should you know before getting started? In this beginner-friendly guide, we break it all down, so you can decide if CFD trading is right for you.
What Are CFDs & How Do They Work?
Contracts for Difference — commonly known as CFDs — are a popular way to speculate on financial markets without owning the underlying asset. They’re used by traders who want to take advantage of rising or falling prices, often with the help of leverage.
But what exactly are CFDs, how do they work, and what should you know before getting started? In this beginner-friendly guide, we break it all down, so you can decide if CFD trading is right for you.
What Is a CFD?
A Contract for Difference (CFD) is a financial derivative that allows you to speculate on the price movement of an asset — such as shares, forex, indices, or commodities — without actually buying or selling the asset itself.
Instead of owning the asset, you enter into a contract with a broker to exchange the difference in price between the time you open the trade and the time you close it.
If the price moves in your favour, you make a profit. If it moves against you, you incur a loss.
How Do CFDs Work?
When you open a CFD position, you're making a decision based on whether you think the price of an asset will go up or down.
If you believe the price will rise, you open a buy (long) position.
If you think the price will fall, you open a sell (short) position.
The difference in price between your entry and exit point determines your profit or loss. For example:
You buy a CFD on a stock at £100 and sell it later at £110 — you make £10 profit per share.
You sell a CFD at £100 and buy it back at £90 — again, you make £10 per share.
CFDs are often traded with leverage, meaning you only need to put down a fraction of the full trade value — known as margin — to open a position. While this can increase potential returns, it also magnifies losses.
What Can You Trade With CFDs?
CFDs offer exposure to a wide range of global markets. With one trading account, you can speculate on:
Shares (e.g. UK or US listed companies)
Indices (e.g. FTSE 100, S&P 500, DAX)
Forex (major and minor currency pairs)
Commodities (e.g. gold, silver, oil, coffee)
Cryptocurrencies (e.g. Bitcoin, Ethereum — through regulated brokers)
ETFs and Bonds (in some platforms)
This flexibility makes CFDs attractive to traders who want to diversify their portfolio or react quickly to market events.
Advantages of CFD Trading
There are several reasons why CFDs are popular among traders in the UK.
1. Leverage
With leveraged trading, you can open a larger position with a smaller deposit. For example, using 10:1 leverage, a £1,000 trade would only require £100 upfront.
2. Go Long or Short
CFDs allow you to profit from both rising and falling markets. This is particularly useful during periods of economic uncertainty or volatility.
3. Wide Market Access
CFDs cover a vast range of assets, giving you exposure to global markets from a single platform.
4. No Stamp Duty
Since you don’t own the underlying shares, CFD trades are not subject to UK stamp duty. However, other taxes may still apply.
Risks of CFD Trading
Despite the advantages, CFDs carry significant risks — especially for beginners. It’s essential to understand these risks before you start trading.
1. Leverage Increases Losses
Just as leverage can magnify profits, it can also amplify losses. If a trade moves against you, you could lose more than your initial deposit if not properly managed.
2. Market Volatility
CFD markets can be highly volatile, especially around major economic announcements. Prices can move quickly, triggering stop-losses or margin calls.
3. Overtrading Risk
Because of the ease of access and low capital requirements, some traders fall into the trap of making too many trades without a clear strategy.
4. Overnight Fees
Holding CFD positions overnight often incurs financing charges, which can eat into profits over time.
5. Complex Products
CFDs are complex and require a solid understanding of market movements, risk management, and trading platforms.
Regulation and Safety in the UK
CFDs are legal and regulated in the UK by the Financial Conduct Authority (FCA). To protect retail investors, the FCA has introduced several measures, including:
Leverage caps (e.g. 30:1 for major forex pairs, 5:1 for shares)
Negative balance protection, ensuring you can’t lose more than your account balance
Risk warnings on all CFD broker websites
Ban on incentives to promote CFD trading to retail investors
Always use an FCA-regulated broker. This ensures your funds are held in segregated accounts and you’re protected by the Financial Services Compensation Scheme (FSCS) in the event the broker goes bust.
You can check a broker’s registration status on the FCA Register.
FAQs: Understanding CFDs
Are CFDs the same as buying shares?
No. With CFDs, you don’t own the asset — you’re simply speculating on its price movement.
Do I pay tax on CFD profits?
Yes. Profits from CFD trading are usually subject to Capital Gains Tax (CGT). Unlike spread betting (which is typically tax-free), CFDs are treated like other investments. Always consult a tax adviser for personal advice.
Is CFD trading suitable for beginners?
CFDs are complex instruments and may not be suitable for everyone. If you’re new to trading, it’s best to start with a demo account, learn how leverage works, and develop a solid risk management plan.
Can I trade CFDs full time?
Some traders do trade CFDs full time, but it requires experience, capital, and a well-tested trading strategy. For most, it’s better to start part-time while building knowledge.
CFD Trading vs Spread Betting: What’s the Difference?
While both CFDs and spread betting allow you to speculate on market movements, there are a few key differences:
Tax treatment: Spread betting is usually tax-free in the UK; CFD profits are taxable.
Contract structure: CFDs involve buying/selling contracts based on the number of units; spread betting is based on pounds per point of movement.
Availability: Some markets or brokers may offer one but not the other.
For a detailed breakdown, see our guide: Spread Betting vs CFD Trading – What’s the Difference?
Getting Started with CFD Trading
If you’re considering trying CFDs, follow these steps to minimise risk:
Choose an FCA-regulated broker – safety first.
Start with a demo account – practise with virtual funds.
Learn the basics – understand order types, leverage, and risk tools.
Develop a strategy – define your entry/exit rules.
Use stop-losses – never trade without a risk cap.
Manage your risk – never risk more than 1–2% of your account on a single trade.
Trading without a plan is gambling. Trading with a plan is a skill.
Final Thoughts
CFDs can be a flexible and powerful trading tool — but only if used wisely. With the ability to trade long or short on a wide range of markets, and with leverage to boost exposure, CFDs offer exciting opportunities.
However, the same features that make them attractive also make them risky, particularly for inexperienced traders. Always prioritise education, risk management, and regulatory protection before you start.
If you’re serious about trading CFDs, take the time to practise, learn, and build a trading plan that fits your financial goals.
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