How CFD Trading Works
CFD trading works by exchanging the change in an asset’s price rather than buying the asset itself. You open a contract with a provider, choose a position size and direction, then receive or pay the price difference when the position closes, after costs and adjustments. As ASIC’s Moneysmart explanation of CFDs stresses, gains and losses depend on the full position, not just the money required to open it.
The practical sequence is straightforward: read the quote, calculate exposure, provide margin, place the order, monitor the account and close the position. This guide follows that sequence; the broader CFD trading overview covers the product’s wider uses and risks.
For US readers: do not assume an accessible trading website is authorized to offer you CFDs. On June 29, 2026, the SEC announced settled charges over stock CFDs sold to US retail investors without the required registration and exchange trading. Check eligibility under your local rules before considering an account.
What the CFD Contract Covers
A retail over-the-counter CFD is an agreement between you and its issuer. The underlying market might be a share, currency pair, commodity or stock index, but the contract does not give you ownership of that asset. Buying a share CFD is not the same transaction as buying shares through a stockbroker.
The provider quotes prices and sets contractual terms for opening, maintaining and closing positions. You also depend on it to meet its payment obligations. This is counterparty risk, alongside the risk of unfavorable market movements. A profitable price move does not remove the possibility of problems at the provider.
Read the contract details before using the order ticket. The instrument name alone does not tell you its contract size, trading currency or settlement terms.
Reading the Quote and Choosing a Position
A CFD quote normally contains two prices: the bid, at which you sell, and the ask, at which you buy. The difference is the spread. IG’s explanation of CFD quotes and contract sizes describes how these prices apply when opening and closing trades.
Suppose a hypothetical share CFD is quoted at $99.90 / $100.10. You can buy at $100.10 or sell at $99.90. The spread is $0.20 per unit.
Buying opens a long position, which benefits from a price increase before costs. Selling opens a short position, which benefits from a decrease. To close the long, you sell at the available bid; to close the short, you buy at the available ask. The separate guide to going long and short with CFDs covers that directional choice.
Position size needs equal attention. One share CFD unit often represents one share, but other contracts can have different multipliers. An index contract might specify a cash value for each point of movement. “One contract” is not a universal measure of risk.
For the worked example below, assume each unit represents one share. A position of 100 units therefore gains or loses $100 for every $1 change in the relevant closing price, before other charges.
Opening the Trade: Margin Rather Than Full Payment
You generally provide a percentage of the position’s value as initial margin instead of paying its full value. Singapore’s MoneySense guide explains this margin arrangement and the obligation to maintain sufficient funds while a position remains open.
Assume you buy 100 units at $100.10 and the provider requires 20% initial margin:
Position value: 100 × $100.10 = $10,010.
Initial margin: $10,010 × 20% = $2,002.
The $2,002 supports $10,010 of exposure. It is not a fee, an asset purchase or a promise that losses will stop at $2,002. The position still changes by $100 for every $1 price move. Our guide to CFD margin and exposure explains the relationship in more detail.
Next comes the order instruction. A market order requests execution at the available price for your size; it does not guarantee the quote displayed a moment earlier. A limit order sets a price boundary but may remain unfilled. IG’s order documentation distinguishes these instructions and explains why execution can differ from an indicative quote.
After submitting, check the confirmation for the filled quantity and execution price. Those figures, not the price you hoped to receive, belong in your profit and loss calculation.
Calculating CFD Profit and Loss
The calculation uses the full position size and the difference between execution prices. For a share CFD where each unit represents one share:
Long position: (closing sell price − opening buy price) × units.
Short position: (opening sell price − closing buy price) × units.
The following hypothetical outcomes use 100 units and the opening quote of $99.90 / $100.10. They include the effect of trading across the spread but exclude commissions, financing and other adjustments.
| Position | Opening execution | Closing execution | Result before other costs |
|---|---|---|---|
| Long, price rises | Buy at $100.10 | Sell at $104.90 | $480 profit |
| Long, price falls | Buy at $100.10 | Sell at $94.90 | $520 loss |
| Short, price falls | Sell at $99.90 | Buy at $95.10 | $480 profit |
| Short, price rises | Sell at $99.90 | Buy at $105.10 | $520 loss |
For the profitable long, the arithmetic is ($104.90 − $100.10) × 100 = $480. For the losing long, it is ($94.90 − $100.10) × 100 = −$520.
Changing the margin requirement would not change these dollar outcomes if the quantity and execution prices stayed the same. Changing the quantity would. That distinction is central to CFD position sizing: affordable margin does not automatically mean acceptable exposure.
Monitoring the Position and Account
An open position has a running, or unrealized, profit or loss. Your account balance generally records booked transactions, while equity also reflects open positions. IG’s product disclosure statement explains account equity and margin monitoring, including how changing prices affect available account resources.
Assume the account starts with $3,000, has no other trades and buys our 100 units at $100.10. If the bid remains $99.90, the immediate running loss is $20. Ignoring fees, equity is therefore $2,980.
If the reserved margin remains $2,002, the remaining margin capacity is $978. This example assumes a fixed requirement; actual calculations follow the provider’s terms. The useful distinction is between the cash deposited, the amount reserved and the equity left after open losses.
When the Provider Closes a Position
If equity falls too far, the provider may close positions rather than wait for your planned exit. Under FCA rules for retail CFDs, account funds reaching 50% of the required margin trigger margin closeout requirements. Those rules also provide account-level negative balance protection.
Australian retail CFD protections also include margin closeout rules and negative balance protection. These safeguards are jurisdiction dependent, not universal contract features. They do not prevent you losing the funds in a protected trading account.
Check the terms covered in our guide to CFD margin calls and stop-outs. Do not treat a possible warning message as your exit plan.
Costs That Change the Final Result
The price result is only one part of the account result. Spreads, commissions, funding and conversion charges can reduce a gain or increase a loss. Providers structure these differently; IG’s published CFD fee explanation, for example, distinguishes spread charges from share CFD commissions and other costs.
In the profitable long example, assume an opening commission of $5, a closing commission of $5 and total financing charges of $8:
Net result: $480 − $5 − $5 − $8 = $462 profit.
These are illustrative charges, not a broker quotation. The spread is already reflected in the opening buy and closing sell prices, so subtracting it again would count it twice.
Holding a cash CFD beyond the provider’s funding cutoff can create overnight charges or adjustments. The FCA’s review of CFD pricing highlights how overnight funding can affect customer outcomes, particularly as holding periods lengthen. Check the rate, calculation basis and charging schedule rather than estimating the cost from your margin deposit.
Share and index CFDs can also receive dividend adjustments. Long positions commonly receive a credit and shorts a debit, subject to the contract’s terms. IG’s dividend adjustment explanation shows why this compensates for dividend-related price changes rather than creating a free return.
Use the guide to CFD trading costs to separate the price movement from the charges attached to executing and holding the trade.
Closing the Position and Settling the Difference
Use the platform’s close-position instruction and check the confirmation. Simply submitting an opposite trade may not close the original: some accounts permit separate long and short positions in the same instrument. The FCA’s findings on matched CFD positions show that keeping both open can also mean paying funding on both sides.
In our example, closing the entire profitable long realizes the $480 price gain. After the assumed $18 of charges, a starting balance of $3,000 becomes $3,462, provided there are no other transactions or adjustments. The margin reserved for that closed position is no longer needed.
Stops Do Not Always Guarantee an Exit Price
A stop-loss order can request closure after an adverse price move, but an ordinary stop does not guarantee execution at its trigger price. A market gap can produce a worse fill. ASIC’s CFD investor guide explains the distinction between ordinary and guaranteed stops. Guaranteed stops, where offered, carry terms and potential charges.
If our long has a stop at $97.10, the planned price loss is ($100.10 − $97.10) × 100 = $300. An ordinary stop filled at $96.60 would instead produce a $350 loss before charges. See CFD stop-loss orders and guaranteed stops for the order mechanics.
Check Whether the Contract Expires
Not every CFD remains open indefinitely. MoneySense distinguishes CFDs with and without expiry dates. Continuing exposure beyond an expiry may require closing the old contract and opening another, realizing the existing result and potentially incurring new charges. Check expiry and rollover instructions before opening the trade.
Checks Before Submitting an Order
Before committing money, write down four things:
- The quantity, contract multiplier and cash effect of a one-point price move.
- The total exposure, required margin and remaining account capacity.
- The intended exit and the loss if execution occurs at a worse price.
- The expected commissions, funding and other adjustments over the holding period.
These checks test the mechanics, not whether a trade will succeed. ASIC reported that 68% of retail CFD investors lost money in the 2024 financial year. A small margin requirement should never be mistaken for a small financial commitment. If you cannot reproduce the potential result from the quote and contract size, pause before placing the order.