When you trade CFDs, you’re entering into a contract for difference (CFD), which is an agreement to exchange the difference between the opening and closing price of your position.
‘CFDs are often used when wanting to trade tactically on shorter-term price movements or hedging other existing positions. This is because CFD trades enable you to take a position on the price of an asset by going long (buying) or going short (selling).
One of the main benefits of CFD trading is the ability to use leverage, giving you full market exposure while only having to commit a deposit to open your position (known as a margin). So, if you wanted to open a A$100 CFD trade on HSBC shares, you’d put down a margin (often 20%) to trade the movement of HSBC’s share price – an initial sum of A$20.
But, trading with leverage carries risk. While it can amplify your profits, it can also magnify your losses. That’s because any profit or loss is calculated using the full size of the position, rather than your margin amount. So, with our HSBC example, your profit or loss would be calculated on the full A$100, not your A$20 margin. Learn how to manage your risk.
