CFDs explained
A CFD - contract for difference - is an agreement between you and a broker to exchange the difference in the price of an asset between when a trade is opened and when it is closed. You take a position on the price of an instrument without owning the underlying asset.
CFDs can be used to speculate on a wide range of markets, including among others, shares, indices, commodities, and forex. Because you don't own the underlying asset, you're only getting exposure to its price movements, and you can go long (buy) or short (sell), meaning you can potentially profit from falling markets as well as rising ones.
Ownership and voting rights
When you trade a CFD it's important to remember that:
- You do not own the underlying asset
- You do not have voting rights
- You are entering into a contract based on the price movement of the underlying asset
This is different from buying physical shares through an investment account, where you become a shareholder.
What affects spreads?
The spread is the difference between the bid (sell) price and the ask (buy) price. Two major factors that impact spreads are:
- Market volatility
- Market liquidity
During periods of high volatility or low liquidity, spreads may widen. Your internet connection or trading platform features do not determine market spreads.
Explore more in our related guides:
- The mechanics of trading – How to read prices, calculate profit and loss, and apply leverage.
- Risk management – Key tools and concepts to help protect your capital, from stop-loss orders to margin requirements.