CFD trading

As CFDs are a derivative product, you don't actually own the underlying instrument that you are trading on. This means that you do not have to pay UK Stamp Duty, saving you the stamp duty charge associated with regular share dealing*. 

*Tax laws are subject to change and depend on individual circumstances. 

CFDs work using contracts that track the live prices of financial markets. When you trade one of these contracts, you’ll exchange the difference in the market’s price from when you open your position to when you close it. You can buy CFDs to open a long position or sell them to go short. 

For example, say you buy one UK 100 CFD when the index is at 10,000, then sell it at 10,100. You'll exchange the difference between 10,000 and 10,100. Since the UK 100 is priced in £s, you would profit £100. If the UK 100 fell to 9,900 instead, you would incur a loss of £100.

Your total profit or loss is dictated by the number of contracts you buy or sell. 

Learn more about how CFDs work. 

CFD margin works by only requiring you to hold a fraction of a trade’s total value in your account in order to open and maintain your position. However, your final profit and loss will still be based on the full size of your trade. 

Trading £1000 of Barclays stock with CFDs, for example, might only require you to have £200 in your account as margin. But if that stock then increases to a value of £1100, you’ll make the full £100 as profit – the same as if you’d paid the full £1000. If the stock falls to £900, you still lose £100. 

Essentially, in this example you’d have made £100 profit from an initial outlay of just £200, a gain of 50%. Without CFDs, you’d still have made £100, but you’d have paid £1000. Your gain would only be 10%, meaning the CFD margin has magnified your profits. 

However, exactly the same effect applies to losses – which is why risk management is a key part of CFD trading. 

Find out more about how margin works in CFDs. 

To calculate CFD profits, you multiply the difference between the opening and closing price of your trade, by the number of contracts you have traded. 

For example, if you have bought 10 CFDs in the UK 100, at a price of 10,000 and sold at a price of 10,010. Your profit would be the 10 difference in the buy and sell price, multiplied by the the number of contracts you traded - in this case, 10 CFDs. So your profit would be £100, as the UK 100 is priced in GBP. 

If you had been trading a market priced in a different currency, for example USD, the calculation would be a profit of $100.

Of course, you'll need to minus any overnight financing fees and commission charges, if applicable, to calculate the net outcome of your trade.

Learn more about how to trade CFDs.