CFD trading Enjoy excellent trading conditions when trading the global financial markets with CFDs ThinkMarkets > CFD trading Why trade CFDs Tight spreads We provide the lowest available spreads on CFDs without any commissions so that you can maximize your winnings. Wide range of markets Diversify your trading with our wide range of CFD markets, including indices, commodities and energies. Flexible trade sizes Our smaller contracts allow you to position yourself with precision wherever you want in the markets. More trading information Account types Market pricing Trading guides library Placing your first trade What are CFDs Contracts for difference (CFDs) are derivative trading instruments that allow traders to speculate on the movements of financial markets, such as indices, commodities and oil, without owning the underlying market. By trading CFDs you are basically opening a contract with the broker. The profit or loss is then calculated based on the price difference of a market from the moment you open a position until you close it. Advantages of trading CFDs With an increasing number of traders choosing CFDs as their favourite financial instrument to trade the global financial markets, let’s take a look at the benefits of CFDs, as opposed to traditional investing. Go long and short If you are familiar with traditional investing, you will know that traders are limited in their ability to profit from their predictions in the sense that you cannot sell a share that you have not bought before. That’s where CFDs come into play. CFDs allow traders to profit both on rising and falling price movements, simply because with CFDs you do not essentially own the underlying market. Leverage The second clear benefit of CFDs is the opportunity to trade on margin, also known as leverage. This means, that if a trader wants to control a position on DAX worth £2,000 and the margin requirement of the broker is 5%, then he will only need £100 to open the trade. It is important to note here that in a profitable scenario, profits are calculated on the full size position. However, losses follow the same calculation too. That’s why traders should use caution when trading on margin. Hedging One of the most popular ways to use CFDs is for hedging positions. Let’s suppose that you have bought a share, the price is pushing lower and your profit and loss is in red territory. In this scenario, opening a short CFD position on the share allows you to limit your losses, as the short position will be gaining value should the market continue moving lower. Flexible contract sizes Structuring the size of your position according to your risk profile is key for long-term profitability in trading. For that reason, when starting with CFDs it is important to choose a broker who offers variable contract sizes. In that way, less experienced traders can begin with mini contracts and lower exposure to the markets, whereas seasoned traders can still trade in larger volumes. Are you ready to trade live? Create account How CFD trading works CFDs were initially designed for share trading. With their popularity growing over the years, CFDs are now used to trade a wide range of markets including indices, energies and commodities. In CFD trading, there are two prices: the buy and the sell price. The difference between the two is called the spread. By trading at the buy price, you will profit if the asset’s value increases. By trading at the sell price, you will profit if the asset’s value decreases. Let’s take a look at some trading examples to find out how CFD trading works in practice. CFD trading examples Going short on DAX Let’s suppose that market rumours for the German banking sector suggest that the DAX is about to take a hitting. For that reason you decide to go short (sell) 5 contracts of GER30 at the price of 13,050, which equals to €5 per point movement. Winning scenario Your prediction proves to be right and the market pushes lower to 12,946. You decide to exit the trade and secure your gains. The total profit is (13,050 – 12,946) x €5 = €520. Losing scenario Despite the rumours, the market keeps pushing higher above 13,100. At this point, you decide to close the position at 13,089 in order to avoid bigger losses. The total loss is (13,123 – 13,050) x €5 = €-365. Going long on S&P500 Now let’s take a look at how a long trade would look like. The S&P500 is trading at 2,601, your technical analysis gives you a buy signal and you decide to go long 3 contracts. In this market, 3 contracts equal to $30 for each point movement. Winning scenario Five minutes before market close, the market price has moved higher to 2,619 and you decide to materialize your profit, rather than risk an overnight move against you. Your total profit is (2,619 – 2,601) x $30 = $540. Losing scenario During the US session, some unexpected breaking news push the index lower and the market price is now at 2,588. You decide to cut your losses and exit the trade. Your final loss is (2,601 – 2,588) x $30 = $-390. Although the profit and loss is calculated in the currency of the asset class, there is no reason to worry. A ThinkMarkets account automatically calculates your profit and loss into your account’s currency in real time based on the exchange rate. 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