Back to Blog
How It Works

What Is CFD Trading?


CFD stands for Contract for Difference. A CFD is a financial derivative that allows traders to speculate on the price movements of an underlying financial security. It is an agreement where one party pays another party the difference in value from when the trade was opened to when it was closed. At Trade Nation CFDs are available on well over a thousand different markets from our MT4 plaform. Unlike our spread trades which have fixed spreads, the spreads on CFDs are variable.

CFD Trading Explained in 3 Points

1. CFD Trading gives you the opportunity to profit from the rise or fall of a market without having to own, or sell, the underlying asset.

2. CFD Trading is a leveraged product, you are only required to deposit a percentage of the total value of your position to trade a CFD.

3. You can go long or short of a huge number of different markets when trading CFDs

History of CFDs

The first CFDs were devised in London in the 1990s. Initially they were used by hedge funds looking to go short (that is, sell something they don’t own) and also place trades which were too big to be executed in the underlying market, without causing dramatic price moves.

It soon became obvious that CFDs offered the perfect vehicle for leveraged trading and going short as well as long on all kinds of financial markets.

The tech boom of the late 1990s provided a wealth of new markets ideally suited to CFDs, and CFD trading has now spread to other major financial centres. Approximately a third of the total volume traded on the London Stock Exchange is CFD-related.

Why Trade CFDs?

Here’s 3 Reasons why you should trade CFDs:

1. CFD traders can hedge against declines in their share portfolio by short selling CFDs against the securities they physically hold. In this way, they can protect themselves from falling prices without incurring the costs of closing out their physical shares.

2. CFD trading is leveraged. This means you only have to put down a small percentage of the underlying value of a trade to control all of it.

3. CFDs allow you to trade multiple asset classes from one account.

A Trade Nation CFD account provides access to well over a thousand different markets from a single account. This means you can centralise your speculative and hedging activity. Running your own account from one platform, without having to instruct a broker to act on your behalf, and monitoring market movements in real time, are all major advantages of having a CFD account with Trade Nation.

 

 


Financial spread trading comes with a high risk of losing money rapidly due to leverage. You should consider whether you understand how spread trading works and whether you can afford to take the high risk of losing your money.