What is CFD Trading?
A Plain English Guide for UK Investors

The Short Version

A CFD (Contract for Difference) is a financial contract between you and a broker. You agree to exchange the difference in the price of an asset — like the FTSE 100, gold, or a share — between when you open the trade and when you close it.

You never own the underlying asset. You're purely speculating on whether the price goes up or down.

Going Long vs Going Short

One of the key advantages of CFDs over buying shares directly is the ability to profit from falling prices — this is called "going short".

• Going long (buying) — you profit if the price rises. This is what most people think of as "normal" investing.
• Going short (selling) — you profit if the price falls. You're essentially borrowing the asset, selling it, and hoping to buy it back cheaper. The broker handles all of this mechanically.

In practice, you just click "Buy" or "Sell" in the platform. The maths happens automatically.

Leverage: Power and Peril

Leverage is what makes CFDs both attractive and dangerous. It allows you to control a position much larger than the cash you put up.

Margin: What You Actually Put Up

When you open a CFD position, you deposit a percentage of the full trade value as "margin" — essentially a good faith deposit. The margin requirement depends on the leverage allowed for that asset.

• FTSE 100 at 20:1 leverage → you need 5% margin. A £10,000 position requires £500 margin.
• Gold at 20:1 leverage → 5% margin requirement
• Individual UK shares at 5:1 → 20% margin requirement

If your trade moves against you and your account equity falls below the required margin level, you'll receive a margin call — the broker may close your position to prevent a negative balance.

Overnight Funding Charges

CFDs are not free to hold overnight. If you keep a position open past the daily cutoff (usually 10pm London time), you'll be charged an overnight financing fee. This is roughly equivalent to:

Position size × (benchmark rate + broker markup) / 365

For short-term trades held intraday, this doesn't matter. For positions held for weeks or months, overnight charges can erode profits significantly. Some spread betting products and CFD futures contracts don't have overnight charges — worth checking with your broker.

CFDs vs Spread Betting: Key Differences

FCA Regulation and Your Protection

All CFD brokers operating in the UK must be authorised by the Financial Conduct Authority. FCA regulation provides:

• Negative balance protection — you can't lose more than your deposit
• Leverage caps — max 30:1 on major FX, 20:1 on major indices
• FSCS protection — up to £85,000 if the broker goes bust
• Mandatory risk warnings — brokers must disclose what % of retail accounts lose money

Always verify your broker's FCA authorisation at register.fca.org.uk before depositing money.

The Risks: Read This