How to trade CFDs
The nature of CFD trading means there is the potential to make money whether the market price goes up or down.
Because of this, CFDs are always quoted with two prices. The lower one is called the bid price and the higher one is the offer price. If you expect that the price will fall, you sell at the bid price. If you believe that the price will rise, then you buy by at the offer price.
The difference between the bid price and the offer price is called the spread.
+For equities, one CFD is equivalent to one share. For a shares index or commodity, one CFD is equivalent to one contract of the underlying asset. For example, one CFD on the UK 100 trading at a price of 6000, equals a position size of £6000, and for every one point movement in the UK 100 you make or lose £1.
Let's run through a few examples of different markets to illustrate how they work.
Trading an equity CFD
Let's say that UK company, Vodafone, has a dealing quote of 124 - 124.1 pence. You would sell at the bid price (124) or you would buy at the offer price (124.1). The spread is the difference between the two prices, which is 0.1 pence in this example.
Let's say you expect the share price to rise and you decide to use CFDs rather than traditional share dealing to back your view. You buy at 124.1.
BUY PRICE -
SELL PRICE =
It turns out that you're correct and the underlying price of the shares does rise. The new quote price is 154.1 (bid) - 154.2 (ask) and you decide to close out your buy trade through selling at the bid price of 154.1. This gives you a gain of 30 pence on each share you held.
For equities, one CFD is equal to one share. If you had bought and sold one CFD, this would be the same as buying and then selling a single share. So, buying and selling one CFD in this example would give you a profit of 30 pence. If you bought and sold 100 CFDs, then your profit would be £30 (equivalent to 100 shares).
Trading an index CFD
Using CFDs to trade an index is just as simple as using CFDs to trade an equity. Let's consider the UK 100.
If our UK100 quote is say 5802 - 5803, then this means you can sell the index at 5802 or buy it at 5803. Let's say you buy one CFD at 5803 as you expect the index to rise. This time, things don't go as expected, and the index falls to 5783 - 5784.
You decide to close your trade by selling one CFD at the bid price, 5783.
In this case, your loss is calculated as follows:
OPENING LEVEL -
CLOSING LEVEL =
LOSS IN POINTS
Because one CFD is equal to £1 per UK100 point, your loss is £20.
Remember: with CFDs, you realise your profit or loss in the same underlying currency that the index is traded in. For instance, if you buy or sell CFDs on a U.S. index such as the US 30 (Dow Jones Industrial Average), then your profit or loss would be in U.S. dollars.
Many commodities, such as gold, are also traded in U.S. dollars. This also means that your profit or loss is calculated in U.S. dollar terms. Your profit or loss, however, is automatically settled in your account's base currency, at no cost.
Any trading scenarios shown in this material are for illustrative and educational purposes only. They should not be considered recommendations or advice. Most examples do not factor in fees and taxes. These costs will impact the outcome of your transaction.