What is CFD trading

When you trade a CFD, you are not buying or selling the underlying asset. You are entering a contract with the broker. The contract states that one party pays the other the difference between the asset's price at the time the trade was opened and its price at the time the trade is closed.

If you think a market will rise, you open a buy position, also known as going long. If you think it will fall, you open a sell position, also known as going short. Your profit or loss is the difference between the opening and closing price, multiplied by the size of your position.

One of the defining features of CFD trading is the ability to take a position in either direction. You are not limited to profiting from rising prices.

Going long means opening a buy position. You profit if the price of the asset rises and lose if it falls. This is how most traditional investment works.

Going short means opening a sell position. You profit if the price falls and lose if it rises. Short positions allow CFD traders to take a view on falling markets without having to own the asset first.

The mechanics are the same in both directions. Your profit or loss is the difference between the opening and closing price, multiplied by your position size, and adjusted for any holding costs accrued while the trade was open.

Suppose EUR/USD is trading at 1.0850. You believe the price will rise and open a long position of one standard lot, which represents 100,000 units of the base currency.

Two hours later, EUR/USD has risen to 1.0870. You close the trade. The price has moved 20 pips in your favour.

On a standard lot of EUR/USD, each pip is worth approximately $10. A 20-pip move on one lot is therefore $200 in profit, before any commission or financing costs.

If the price had instead moved against you to 1.0830, the same calculation produces a $200 loss.

Your exposure is based on the full notional value of the position, not the margin you deposit.

This is the essential mathematics of CFD trading. Small price movements can produce significant profits or losses relative to the capital you have committed.

CFDs are traded on margin, which is a form of leverage. This means you only need to deposit a fraction of the total value of the position to open the trade. The remainder is, in effect, borrowed from the broker.

Leverage amplifies both profits and losses. A trade that would otherwise require $10,000 of capital might be opened with $100 of margin at 1:100 leverage, but the profit or loss is calculated on the full $10,000 position.

This is the central feature of CFD trading and also its central risk. The same leverage that allows a small deposit to control a large position will magnify losses if the market moves against you. Losses can exceed your initial deposit.

JT Markets offers CFD trading on 80 instruments across four asset classes:

• 60 forex pairs, including 7 majors, 21 crosses and 32 exotics
• 13 global equity indices, including the S&P 500, FTSE 100, DAX 40 and Nikkei 225
• 5 precious metals: gold, silver, platinum and palladium
• 2 oil benchmarks: WTI and Brent crude

All trades are executed on the MetaTrader 5 platform. Spreads start from 0.0 pips on Elite accounts. Leverage is available up to 1:1000 on Standard and Advanced accounts.