What is an example of a CFD trade?

A CFD trade is an agreement to exchange the difference in an asset's price between the time you open a position and the time you close it. You use margin to open a leveraged position, so profit or loss is calculated from the full position value, not only the margin you deposit.

A long CFD trade works like this. You buy 100,000 EUR/USD at 1.1000, a full position value of $110,000. At a 2% margin requirement, you need $2,200 to open it.

• If the price rises to 1.1100, the profit is (1.1100 - 1.1000) x 100,000 = $1,000, before the spread, commissions, and overnight fees.

• If the price falls to 1.0900, the loss is (1.0900 - 1.1000) x 100,000 = -$1,000, before the spread, commissions, and overnight fees.

A short CFD trade works the same way in reverse. You sell 10 ounces of gold at $2,000 an ounce, a full position value of $20,000. At a 2% margin requirement, you need $400 to open it.

• If the price falls to $1,900, the profit is ($2,000 - $1,900) x 10 = $1,000, before the spread, commissions, and overnight fees.

• If the price rises to $2,100, the loss is ($2,000 - $2,100) x 10 = -$1,000, before the spread, commissions, and overnight fees.