What is CFD trading?

Before you place a trade, it helps to know exactly what you’re trading. The Navigator works on CFDs. The name sounds technical, but the idea behind it is simple.

What a CFD actually is

• CFD stands for “contract for difference”. You trade the change in a price, not the thing itself.
• Trade a CFD on the Nasdaq 100 and you own no Nasdaq shares. You settle the difference between the price when you open the trade and when you close it.
• If it moves your way, that difference is your profit. If it moves against you, it’s your loss.
• One way to picture it: you and a friend agree on today’s gold price, and later whoever called the direction right collects the difference. Neither of you ever bought any gold.

Buy or sell, you can profit either way

• Buy, or go long, if you think the price will rise. You profit as it goes up.
• Sell, or go short, if you think the price will fall. You profit as it goes down.
• Selling to profit from a fall is the new part for most people. With ordinary shares you’d have to own them before you could sell; with a CFD you don’t.

Buy — going long

If the price rises, you profit.

Sell — going short

If the price falls, you profit.

Where a CFD’s price comes from

• A CFD’s price tracks the real market. Your broker quotes it at essentially the same price as the actual Nasdaq 100, gold, or share you’d see anywhere.
• So a Nasdaq 100 CFD follows the same ups and downs as the real Nasdaq 100. You’re trading genuine market movement, not a number someone made up.
• The only small gaps are the trading costs built in, mainly the spread, plus a little adjustment if you hold overnight. We’ll cover those on the fees page.

Benefits of trading with CFDs

• Profit either way — go long or short, with no shares to borrow.
• Many markets, one account — indices, shares, forex, metals, crypto.
• Nothing to own or store — no settlement and no taking delivery; you only trade the price.
• Less cash tied up — you put up a fraction of the trade’s value (this is leverage).
• Low costs — tight spreads on the major markets.

And the trade-offs, so you go in clear-eyed:

• Leverage cuts both ways — it can magnify losses too, and a position can be closed out against you. More on the leverage page.
• Overnight fees — a small cost to hold past the day, so not for keeping for years.
• No ownership — not the route for long-term investing in a company.

Next we’ll look at how your trade size sets what each price move is worth, so profit and loss stops being a guess.