A CFD is a derivative product that allows an individual to trade on the rise or fall in the price of a financial instrument without ever having to own the underlying asset. With CFDs, you can access all the global markets and trade a variety of assets like forex, commodities, metals, indices and stocks.

A trader who wishes to open a CFD position must enter into a contractual agreement with the broker. In this contract, both parties will agree to exchange the difference in the asset's price from the beginning of the contract to the end. If your forecast is correct after the conclusion of the contract, you will benefit. If it is wrong, you will make a loss.

This form of a derivative is useful for traders who wish to trade on margin, hedge against market uncertainty, or take advantage of price movements in either direction. Being able to trade both upwards and downwards trends is a key reason why traders are drawn to derivative products like CFDs.

CFD trading hours differ greatly from instrument class to instrument class – the opening, closing and times markets take breaks can greatly affect the price of your favorite instrument. This is why it is extremely important to know those times. Find out when your preferred markets are open, closed or just taking a break at our Trading Hours Page.

Example 1: A long position that achieves a profit

After careful analysis, you believe that Facebook’s shares are currently trading below their intrinsic value. Therefore, you decide to open up a long position, as you think the price will soon appreciate.

The company is currently trading at $301 a share. You decide to purchase 100 CFDs on Facebook shares, bringing the total purchase price to $30,100. A day later, Facebook has seen a 5% increase in its share price, jumping from $301 a share to $316.

This price increase means that you made $15 per share, which equates to a total profit of $1,500.

Example 2: A short position that suffers a loss

You believe that Tesla’s share price has gotten a little far ahead of itself, and is now due a pullback. You, therefore, decide to open up a short position on the company.

Tesla’s price per share is $740. You decide to sell 25 CFDs on Tesla shares, bringing the total sell price to $18,500. However, the next day, the price of Tesla shares continued to rise, jumping 5% to now trade at $777 per share.

Because of this price rise, you ended up losing $37 per share, which equates to a total loss of $925.

Note: Neither of these examples take into consideration the fees that are associated with trading CFDs. You can find out more about our charges in our Key Investor Information Documents (KIIDs).

If you begin trading CFDs without a thorough understanding of how they work, then CFD trading can be considered unsafe (as you run the risk of losing your invested capital).

To reduce the likelihood of losses, you must be aware of the associated risks and understand how to mitigate them. The main risks you should be aware of include:

• CFDs are a leveraged product

Leverage allows you to trade with a larger amount than what you initially deposited. Essentially it means, if you wanted to open a trade, you would only put up a fraction of the total position value, and the provider will “loan” you the remaining amount.

Leverage can be a double-edged sword. Although it can help increase your profit potential if the markets move in your favor, it can also magnify your losses if the market goes against you. If you fail to manage leverage properly you can easily end up recording losses.

• Market risk

Markets can be notoriously volatile. Therefore, any trade you enter can be subject to significant price fluctuations. Various factors can cause the market to become volatile, including economic news, government and regulatory changes and interest rate changes.

You must be fully aware of the volatile nature of markets before trading CFDs to mitigate any emotional stresses it may cause.

Leverage can be a powerful tool, if used correctly. However, in order to use it correctly, you must consider the following:

• Avoid over-leveraging as it can put you at risk of a margin stop-out.
• The more leverage you take on, the more risk you take. Leverage can magnify your profits-potential, but also magnify your losses.
• Always take measures and steps to manage your risk when using leverage, risk management tools like a stop loss and dealCancellation can be particularly helpful.
• The level of leverage you can use is dependent on where you reside. For example, traders in Europe and Australia will be limited to leverage of 30:1, whereas traders in Japan can use leverage of up to 400:1.
• Certain economic events and indicators can cause the markets to become very volatile. It should be noted that this volatility can cause your potential profits or losses to fluctuate.