A contract for difference lets you trade a price movement, up or down, without ever owning the thing whose price is moving. Here is how it works, how the profit and loss is calculated, and where it can hurt you.
A contract for difference is an agreement between two parties to exchange the difference between the opening and closing price of a position, multiplied by the size of that position. Your broker is the counterparty: buyer to anyone selling, seller to anyone buying.
If the difference is positive, the seller pays the buyer. If it is negative, the buyer pays the seller. That is the entire mechanism.
Because nothing physical changes hands, three restrictions that apply to conventional investing simply do not exist: there is no fixed entry or exit price, no time limit on when the contract settles, and no rule that you must buy before you can sell.
The simplest possible version, with no leverage involved yet.
Illustrative only. CFDs are complex instruments with a high risk of losing money rapidly due to leverage.
P/L = (sell price − buy price) × number of CFDs.
It makes no difference whether you bought first or sold first. The profit or loss is the gap between your buying price and your selling price, multiplied by size. That is worth internalising early, because it is why a falling market is an opportunity rather than a problem.
Sell 10 CFDs at 60.30, the market drops, you buy back at 58.85 to close: (6030 − 5885) × 10 = $1,450.
Nothing stops you opening with a sell. Short selling lets you sell first and buy back lower, so a falling market is tradable rather than something to sit out. Half the year’s opportunities are on the downside.
You are not locked into one market. Forex, commodities, indices, equities and bullion all trade from the same balance, on the same platform, with the same order types.
CFDs trade on margin: you post a fraction of the contract value rather than the whole thing, which frees the rest of your capital. This is also the single most dangerous feature of the product, see the next section.
Leverage is symmetrical. The mechanism that multiplies a gain multiplies a loss just as fast, and you can lose more than you deposited. Between 70% and 80% of retail accounts lose money trading CFDs, not because the product is rigged, but because position sizing is the skill nobody practises. If you read only one more module, read Risk Management.
Demand for bullion is not only industrial. It is a store of value, so when inflation runs, a currency slides or politics turn ugly, money moves into metal precisely because its worth does not depend on any single government. Traded as a CFD it settles in cash, no delivery. Quoted from Sunday evening to Friday evening with a daily break.
An index is a basket of shares whose combined value tracks a market or a sector. The Dow, the S&P 500, the FTSE 100, the DAX, the Nikkei, each moves on trade balance, industrial output, currency strength and political stability. One trade gives you exposure to a whole economy instead of one company’s results.
Roughly $3 trillion changes hands daily. It exists wherever one currency is swapped for another, between banks, central banks, corporates, governments and speculators. It is over-the-counter, so prices come from market makers drawing on counterparty feeds rather than from a single exchange. Open around the clock from Sunday evening to Friday evening.
Module 02
A contract for difference lets you trade a price movement, up or down, without ever owning the thing whose price is moving. Here is how it works, how the profit and loss is calculated, and where it can hurt you.
The basics
A contract for difference is an agreement between two parties to exchange the difference between the opening and closing price of a position, multiplied by the size of that position. Your broker is the counterparty: buyer to anyone selling, seller to anyone buying.
If the difference is positive, the seller pays the buyer. If it is negative, the buyer pays the seller. That is the entire mechanism.
Because nothing physical changes hands, three restrictions that apply to conventional investing simply do not exist: there is no fixed entry or exit price, no time limit on when the contract settles, and no rule that you must buy before you can sell.
Worked example
The simplest possible version, with no leverage involved yet.
Illustrative only. CFDs are complex instruments with a high risk of losing money rapidly due to leverage.
The maths
P/L = (sell price − buy price) × number of CFDs.
It makes no difference whether you bought first or sold first. The profit or loss is the gap between your buying price and your selling price, multiplied by size. That is worth internalising early, because it is why a falling market is an opportunity rather than a problem.
Sell 10 CFDs at 60.30, the market drops, you buy back at 58.85 to close: (6030 − 5885) × 10 = $1,450.
Why trade CFDs
Long or short, rising or falling.
Nothing stops you opening with a sell. Short selling lets you sell first and buy back lower, so a falling market is tradable rather than something to sit out. Half the year’s opportunities are on the downside.
One account, every asset class.
You are not locked into one market. Forex, commodities, indices, equities and bullion all trade from the same balance, on the same platform, with the same order types.
A large position from a small deposit.
CFDs trade on margin: you post a fraction of the contract value rather than the whole thing, which frees the rest of your capital. This is also the single most dangerous feature of the product, see the next section.
The markets
Gold and silver, the classic safe haven.
Demand for bullion is not only industrial. It is a store of value, so when inflation runs, a currency slides or politics turn ugly, money moves into metal precisely because its worth does not depend on any single government. Traded as a CFD it settles in cash, no delivery. Quoted from Sunday evening to Friday evening with a daily break.
Trade the health of a whole economy.
An index is a basket of shares whose combined value tracks a market or a sector. The Dow, the S&P 500, the FTSE 100, the DAX, the Nikkei, each moves on trade balance, industrial output, currency strength and political stability. One trade gives you exposure to a whole economy instead of one company’s results.
The largest market on earth.
Roughly $3 trillion changes hands daily. It exists wherever one currency is swapped for another, between banks, central banks, corporates, governments and speculators. It is over-the-counter, so prices come from market makers drawing on counterparty feeds rather than from a single exchange. Open around the clock from Sunday evening to Friday evening.