Edited and reviewed by: Maria Stylianou | Senior Copywriter

A CFD, which stands for 'contract for difference' is an agreement between a broker and a trader to settle the difference in an asset's value from when you open a trade to when you close it. 

Because CFD trades are handled between two parties and outside of a formal exchange, a CFD is a type of an over-the-counter financial derivative, whose value is based on or ‘derives’ from an asset, such as currency, share, or commodity. With derivatives, you can speculate on the asset’s upward and downward price movements without owning the underlying asset. 

Once you decide to close and exit a CFD trade, the difference between the opening and closing price is either your profit or loss. The more the market moves in line with your prediction, the more profit you'll make. Conversely, the more the market moves against you, the more you'll lose.

CFDs track the price of the assets they represent, so you can buy and sell them much like you would when trading the underlying market. 

One of the main advantages of CFD trading is that you can speculate in either direction – going long or short – so you can take advantage of both upward and downward market movements in any conditions. 

Going long

If you expect an asset's price to rise, you go long (buy), aiming to sell it later at a higher price. If the price rises, you profit from the difference. If it falls instead, you make a loss and owe the broker the difference. 

Going short

If you expect an asset's price to fall, you go short (sell) instead. You profit if the price drops as predicted and make a loss if it rises unexpectedly. 

Example

Say you think a company's share price is going to rise. You could buy 100 shares outright, paying the full price and taking ownership. Or you could trade 100 CFDs on the same share, gaining the same market exposure with a much smaller initial deposit. Let’s put this into practice with the following scenario. 

You buy 100 CFDs at $2.00 per share. The full value of the position is $200 (100 × $2.00), but because CFDs are leveraged products, you only need to put down a portion of that – known as margin (more on this below). 

The price rises to $2.50 and you close the position. You've gained $0.50 per CFD, for a total profit of $50 (100 × $0.50). 

If the price had fallen to $1.50 instead, you'd close at a loss of $0.50 per CFD, which is a total loss of $50. 

Either way, your profit or loss depends on how far the price moves relative to your prediction. 

CFDs are priced based on the value of the underlying asset, with adjustments to reflect transaction costs like spread, commission and overnight charges. Here's how each works. 

What is a spread?

The spread is the difference between the buy price (ask) and the sell price (bid) and it's how your broker is paid for facilitating the trade. If a share is trading at $175.25 (bid) and $175.75 (ask), the CFD price will be similar, with a slight adjustment for the spread. If the CFD price is $175.00 (bid) and $176.00 (ask), the spread is $1.00. 

Tighter spreads generally work in your favour since they reduce the cost of entering and exiting a trade. The spread size varies depending on factors such as the volatility and liquidity of the financial instrument. 

What is commission?

In CFD trading, commission is a fee your broker charges for opening and closing a trade. It’s usually a small percentage of the trade size. If your broker charges 0.1% commission and you buy $10,000 worth of share CFDs, your commission fee would be $10. 

Depending on your account type, some brokers charge commission on trades, or offer a wider spread instead. Check your account details to see which fees apply to you. 

What are overnight funding charges?

Holding a cash/spot CFD position overnight may incur a charge known as a swap fee or overnight funding fee. This reflects the cost of maintaining a leveraged position overnight and is calculated based on factors such as the position size, applicable funding rates and broker adjustments.  

If you trade forward CFDs instead, financing costs are typically incorporated into the price rather than charged as a separate swap fee. 

Understanding how CFDs are priced helps you evaluate the potential costs of a trade before opening a position. For a full breakdown, visit our costs and charges page. 

One of the standout features of CFDs is leverage.

Leverage allows you to control a larger position with a smaller amount of capital (margin), so you can trade positions far greater than your initial outlay. For instance, if your broker offers a leverage ratio of 10:1, you can control a $10,000 position with just $1,000 of your own money. 

Let’s say you want to open a $1,000 CFD position in Brent crude oil and your broker requires 10% margin; you'd only need to deposit $100 to open the trade.  

However, while leverage can increase your potential returns if the markets move favourably, it can also increase your potential losses if the market moves against you. CFDs are complex instruments and carry a high risk of losing money. 

Leverage is both a powerful and potentially hazardous tool in trading that should always be carefully considered.

Margin is the amount of funds you need in your account to open and maintain a leveraged position. It's usually expressed as a percentage of the total trade size and varies across markets. 

There are two types of margin. Both depend on your account equity – the difference between what you've deposited and any gains or losses on your open trades: 

• Initial margin: To open a new position, your available equity must be greater than the initial margin requirement. 
• Maintenance margin: To keep a position open, your available equity must stay above the maintenance margin requirement. If it drops below this, you'll get a margin call asking you to add funds or close positions to reduce your exposure. If you ignore the margin calls or the equity keeps falling, your positions could be closed automatically. 

It's worth remembering that your profit or loss is based on the full value of your position, not just the margin you've put down. 

• Margin Forex pairs such as EUR/USD, GBP/JPY and AUD/USD.
• Shares of major companies from the US, UK, EU, Hong Kong and Australia. 
• Indices including the S&P 500, NASDAQ and FTSE 100. 
• Commodities like gold, silver, oil and natural gas.
• ETFs across different sectors and countries, such as the SPDR S&P 500 ETF Trust (SPY).  
• Cryptocurrencies like Bitcoin, Ethereum and Ripple. 

Pepperstone offers over 1,350 CFD instruments to trade, with competitive pricing across every asset class above. 

Depending on the market and region, some CFDs may also be available as perpetual contracts, which do not have a fixed expiry date.

All CFDs are traded in standardised contracts, called lots. Contract sizes depend on the asset, reflecting how it's traded in the underlying market. 

• Margin FX are traded in standard lots (100,000 units), mini lots (10,000 units) or micro lots (1,000 units). Trading 1 lot of EUR/USD means you're speculating on the price movement of €100,000 worth of the pair.
• Share CFDs are generally traded on a 1:1 basis, meaning 1 CFD represents 1 share. Trading 100 CFDs on a company's shares means you're speculating on the price movement of 100 of its shares. 
• Commodity CFDs represent a set quantity of the underlying commodity, such as 1,000 barrels for crude oil or 100 troy ounces for gold. Mini lots (0.10 lot) and micro lots (0.01 lot) are usually available too, giving you more control over your exposure. 
• Index CFDs are priced per point, at a value that varies by contract. On the S&P 500, for example, each CFD contract might be valued at $10 per point, though this differs by broker. 

Say you think geopolitical instability is likely to push people toward gold. Your broker quotes the gold spread at $4,150.00–$4,150.10, and you believe there's room for the price to climb further. 

You buy 5 mini lots (10 troy ounces per mini lot, so 50 troy ounces in total) of the broker's spot Gold CFD at the offer price of $4,150.10. The total value of your position is $207,505 (50 troy ounces × $4,150.10). Because CFDs are leveraged products, you would typically only need to deposit a percentage of this value as margin. However, any profit or loss is calculated on the full £150,005 position.

Over the next few days, gold trends upward and the quote updates to $4,175.10–$4,175.20. You close the position by selling at the bid price of $4,175.10. 

Outcome: To calculate the profit, we need to consider the price movement and the contract size.

The price moved in your favour from $4,150.10 to $4,175.10 – a movement of $25 per troy ounce.

With a 50-troy-ounce exposure, your total profit is 50 × $25 = $1,250.00. 

Had the market moved $25 the other way, your loss would have been the same: $1,250.00. 

• Short selling: CFDs give you the flexibility to go short, so you can potentially profit from falling prices as well as rising ones.
• Low entry costs: With a relatively small initial deposit, you can gain access to various markets including stocks, margin fx and commodities.
• No delivery or storage required: Since you're only speculating on price direction, you never need to take physical delivery of assets like gold or oil.
• Ease of hedging: You can use CFDs to hedge risk in both leveraged and non-leveraged portfolios, by opening positions in the opposite direction to protect existing trades against a temporary downturn.
• Leveraged capital: As covered above, CFDs let you trade with only a fraction of a position's full value as a deposit, which can increase both profits and losses.

CFDs are inherently high-risk, and there are several aspects that you should take into consideration before trading: 

• Leverage: It can amplify your profits when the market moves in your favour, but it magnifies your losses just as easily when the market moves against you.
• Overtrading: The ease of opening a position with a small deposit can encourage overtrading and excessive risk exposure, which can also drive up transaction costs over time.
• Emotional trading: Leverage can compound the highs and lows of trading. The sudden market shifts may cause stress and anxiety, leading to impulsive decisions.
• Overnight funding costs (swap rates): Holding a spot or cash CFD position overnight incurs a financing fee. This rate is visible on the Pepperstone platform and should be factored in before you start trading.

A few tools and habits can help you keep risk in check: 

• Take profit/limit order: Automatically closes a position once it reaches a level you've set, to lock in profits.
• Stop loss: Automatically closes your position at a price you specify, to limit losses if the market turns against you. Please note that stop-loss and take-profit levels are not guaranteed, so you might not be closed out at the exact level you specify if the market moves quickly or gaps.
• Trailing stop: Automatically adjusts as the market moves in your favour, staying a set distance behind the current price. If the market rises, it moves up to lock in profits. If it reverses, it holds and closes your position to protect gains.
• Price alerts: Some brokers, such as Pepperstone, enable you to set alerts for specific price levels, so you can decide how to act if your chosen market hits a price you’re waiting for.
• Position monitoring: Review your trades regularly to make sure they still align with your risk tolerance and strategy.
• Education: Build your knowledge with guides on technical analysis, fundamental analysis, risk management and market psychology. Pepperstone offers resources for traders at every level.

Pepperstone provides a suite of five innovative platforms, tailored to fit different trading styles. These platforms are accessible at no cost and available across various devices, including mobile, tablet and desktop.

TradingView

Link your Pepperstone account directly to TradingView for advanced charting and news features that help you keep up with market developments.

MetaTrader 5

The enhanced successor to MetaTrader 4 but with faster processing, position hedging support and advanced pending order options, plus a range of tools and indicators. 

MetaTrader 4

A long-standing favourite margin FX platform, offering live quotes, real-time charts, news updates and in-depth analytics. MetaTrader 4 offers a variety of order management tools, technical indicators and expert advisors, suitable for traders of any level. 

cTrader

An intuitive interface with customisable presets and detachable charts. cTrader supports advanced order execution and lets you code in C# programming language. 

Pepperstone platform

Our own platform and app give you a secure, streamlined trading experience wherever you are – with access to margin FX, shares, indices, ETFs and commodities on the go. 

Opening a CFD trading account with Pepperstone is straightforward and you can usually get set up within minutes. 

1. Register: Sign up with your email address and a few basic details. You'll get a free demo account automatically, so you can start exploring the platform straight away, before using real funds.
2. Answer a few questions: We'll ask about your trading background and experience to check that our products are a good fit for you and that you understand the risks involved before you start trading.
3. Verify your identity: Upload proof of ID and address so we can confirm who you are. This is a standard step for any regulated trading account and helps keep your funds and personal details secure.
4. Fund your account: Once you're verified, deposit using one of our supported funding methods and place your first trade.

1. Choose your platform: Download MT4, MT5, cTrader, TradingView or use the Pepperstone platform and app, and open your first position.
2. Choose your market: Pepperstone offers thousands of instruments across FX, indices, commodities, shares and more.
3. Open your position. On the Pepperstone deal ticket, set your contract size, apply stop and limit orders, and check your fees before you buy or sell.
4. Monitor your trades. Track your open positions in real time or use automation to do it for you. Close your trades whenever you like.

Interested in trading CFDs with Pepperstone? Open an account today. 

What does CFD stand for?

CFD stands for 'contract for difference'. It's an agreement between you and a broker to exchange the difference in an asset's price from when you open a trade to when you close it, without you ever owning the underlying asset. 

Who is a CFD trader?

A CFD trader is anyone who speculates on the price movement of an asset using a contract for difference, rather than buying the asset outright. CFD traders range from beginners exploring a new market to experienced traders using leverage to manage capital more efficiently or hedge an existing portfolio. 

How do I open a CFD trading account?

You can open a CFD trading account by applying online, verifying your identity, and funding your account – see 'Opening a CFD trading account' above for the full steps. The process typically takes just a few minutes. 

How do I use CFDs for hedging?

CFDs can be used as a hedging tool because they let you take both long and short positions, helping to counterbalance a loss in one trade with a gain in another.

Say you own $5,000 worth of Tesla shares but expect the price to drop. You could sell an equivalent amount through a CFD (going short) to profit if Tesla's price falls. That CFD profit can help offset the loss on your Tesla shares, reducing the overall impact – without you having to sell your actual holding.* 

*This section and examples are provided for illustrative and educational purposes only. They are not intended as trading or investment advice. 

What is the difference between CFD trading and traditional stock investing?

The two main differences are ownership and leverage. 

With CFDs, you don't own the underlying shares – you're speculating on how the price will move. If the market moves in your favour, you profit; if it moves against you, you make a loss. Traditional stock investing means buying shares outright, which gives you legal ownership and any associated benefits, such as dividends and voting rights. 

CFDs also use leverage, so you only need a fraction of the total trade value as deposit – amplifying both potential gains and losses. Traditional share purchases require full payment upfront. 

CFD trading offers flexibility and speculative opportunity; traditional investing offers tangible ownership and direct participation in a company's equity. 

How do CFD providers make money?

CFD providers make money primarily through: 

Spreads: the difference between the buy (ask) and sell (bid) prices, which you pay when entering and exiting a position. 

Commission: a small fee charged per trade on some assets, depending on your provider and account type. 

Overnight charges: a fee for holding leveraged positions overnight. 

What markets can I trade on?

Pepperstone offers 1,350+ CFD instruments across margin FX, indices, shares, commodities, crypto and ETFs.