A Contract for Difference (CFD) is an agreement between you and a Provider to exchange the difference between the opening and closing value of a trade. With CFDs, you would buy (go long) if you expected the price to rise, or sell (go short) if you thought the price would fall. CFDs therefore give you the potential to make profits in both bull and bear markets, but only if you correctly predict the price movement.

With a CFD trade you pay a deposit of the contract value. This is referred to as the margin or Notional Trading Requirement (NTR). The margin or NTR required is typically 10%, which means that you can take a larger position than you would by buying the underlying investment. This can translate into bigger profits if you invest the right way, or bigger loses if you invest the wrong way. If your trade moves against you, you may need to make further deposits. This is because you must meet the full value of any losses in your account as well as maintaining the initial margin. Margin is required for each trade you place within your account.

CFDs have no fixed expiry date, giving you the freedom to close your position when you choose. To close a CFD trade, you must place an opposing trade i.e. if you are long in 1000 company XYZ CFDs to close your position you would sell 1000 company XYZ CFDs. While your position remains open, your account is debited or credited to reflect financing and dividend adjustments.

There is no Stamp Duty to pay for CFDs in UK equities, though tax laws may change. Non UK equities may attract local taxes, for instance Irish Stocks are liable for Irish Stamp Duty. CFDs are subject to UK Capital Gains Tax which means any profits are potentially taxable and you can offset any losses.

See how a CFD trade works to find out more.

CFD trading is similar to spread betting in many ways and depending on your investment goals, one product may be more suitable for you. Find out more about differences between CFDs and spread bets.