How does CFD trading actually work?

In the last guide we learned what a CFD is. Now let's walk through how a trade actually works, from the moment you open it to the moment you close it. We'll use plain numbers so you can see every moving part.

Step 1: You pick a direction

Every CFD trade starts with a simple choice.

• Buy (go long) if you think the price will rise.
• Sell (go short) if you think the price will fall.

The ability to sell first and buy back later is what makes CFDs different from simply owning shares. You can make money in a falling market.

Step 2: You choose your size

CFDs are traded in units or 'lots'. The bigger your size, the more each price move is worth to you.

Let's say one CFD on a company share equals one share. If you buy 100 CFDs at 50 dollars, your position is worth 5,000 dollars. Every 1-dollar move in the share now changes your profit or loss by 100 dollars (100 units times 1 dollar).

Step 3: You only put down a margin

Here is where leverage appears. You don't pay the full 5,000 dollars. You put down a fraction, called the margin.

If the margin requirement is 20 percent, you only need 1,000 dollars to open that 5,000-dollar position. The broker effectively covers the rest. This is powerful — and it is exactly why losses can grow faster than beginners expect.

Step 4: You pay the spread

The price is always quoted twice: a slightly lower sell price and a slightly higher buy price. The gap between them is the spread, and it is how many brokers make their money.

When you open a trade you start marginally in the red by the size of the spread. The market has to move in your favour just to break even. A tight spread is one sign of a good broker.

Step 5: The price moves, and so does your profit

Once your trade is open, your profit or loss updates in real time as the price moves. This 'floating' profit and loss is not locked in until you close.

Using our example: you bought 100 share CFDs at 50 dollars.

• Price rises to 53 → you are up 300 dollars (3 dollars x 100).
• Price falls to 48 → you are down 200 dollars (2 dollars x 100).

Step 6: You close the trade

To finish, you do the opposite of how you opened. If you bought, you sell. If you sold, you buy back. The difference between your open and close price, times your size, is your result — minus the spread and any fees.

What about overnight?

If you keep a CFD open past the daily cut-off, you usually pay (or occasionally receive) a small overnight financing charge, sometimes called a swap. It is the cost of the broker funding your leveraged position. Hold trades for weeks and these charges add up, which is why CFDs suit shorter-term trading. We explain this fully in its own guide.

Protecting yourself with orders

Serious traders never just watch the screen and hope. They use orders:

• A stop-loss automatically closes your trade if it moves too far against you, capping your loss.
• A take-profit automatically closes it once you hit your target gain.

Setting a stop-loss on every trade is the single most important habit for staying in the game.

Putting it together

Open a direction, choose a size, put down margin, pay the spread, watch the price, and close with an order in place to protect you. That is a CFD trade start to finish. Next, let's look at the company that sits on the other side of all this: the CFD broker.