A contract for difference, or CFD, lets you trade on the price of an asset without owning the asset. Your result is the difference between the price where you open and the price where you close, multiplied by your position size. Every CMC Funded account is simulated, and each trade's result is worked out with that same sum.
What you will learn
- How a CFD trade makes or loses money, with worked numbers
- How going short lets you gain from a falling price
- Which markets you can trade on CMC Funded, and which you cannot
- What it means that every CMC Funded account is simulated
What is a CFD?
A CFD is an agreement to exchange the difference in an asset's price between the moment a trade opens and the moment it closes. The contract's value follows the price of the share, the ounce of gold or the bitcoin, and you never own the asset itself.
Dealing only in the price change makes two things possible that are awkward with the asset itself. You can sell first and buy back later, which is called going short. You can also open a large position with a smaller deposit set aside, called margin. Lesson 3 explains margin, and lesson 6 covers going long and short in depth.
How does a CFD trade make or lose money?
For a buy (long) trade, the result is the closing price minus the opening price, times your size. For a sell (short) trade, it is the opening price minus the closing price, times your size. A positive answer is a gain and a negative one is a loss.
Start with a long trade on a share. A company's shares trade at $50.00 and you buy a CFD on 200 shares, a position worth 200 × $50.00 = $10,000.
- The price rises to $51.50 and you close. The difference is $1.50, so you gain $1.50 × 200 = $300.
- Suppose it falls to $48.75 instead. The difference is minus $1.25, so you lose $1.25 × 200 = $250.
Now a short trade on an index. You sell an index CFD at 5,000 points with a size of $2 per point, because you expect the index to fall.
- It falls to 4,940 and you close by buying back. That is 60 points in your favour, so you gain 60 × $2 = $120.
- Suppose it rises to 5,030 instead. That is 30 points against you, so you lose 30 × $2 = $60.
All four figures leave out trading costs. The spread and commission take a little off every result, holding costs apply to positions kept overnight, and lesson 4 adds them back in.
Why are CFDs riskier than owning the asset?
Leverage is the main reason. Higher leverage magnifies both gains and losses. With margin, a few hundred dollars can hold a position worth thousands, so a small move in the price becomes a large move in your account. In the share example, a 2.5% fall cost $250. If that position had been opened with $1,000 of margin, the same fall would wipe out a quarter of the deposit.
Short positions carry a second risk. A price can only fall as far as zero, but there is no ceiling on how high it can rise, so a loss on a short trade has no natural cap. Traders put a limit on it with a stop-loss order, one of the order types in lesson 5.
Which markets can you trade on CMC Funded?
CMC Funded offers six markets: forex, indices, commodities, shares, cryptocurrencies and prediction markets. Futures and options are not available.
- Forex is one currency traded against another, quoted as a pair such as EUR/USD.
- Indices follow the combined price of a basket of shares, such as a country's largest listed companies.
- Commodities are raw materials, for example gold or crude oil.
- Shares follow the price of a single listed company.
- Cryptocurrencies are digital assets such as bitcoin, priced against a currency like the US dollar.
- Prediction markets are priced on the outcome of a future event. Each outcome trades as a YES and a NO contract priced between $0.00 and $1.00, and the price reads as the chance the market gives that outcome.
The symbol list on the trading platform, Match-Trader, shows which instruments sit in each market. A strategy that depends on futures contracts or option prices will not carry over directly, because neither is available.
What does simulated mean on CMC Funded?
Every CMC Funded account is simulated, in the evaluation and at the reward stage. Your trades do not buy or sell anything in a real market. The arithmetic is the same, though: the price differences, position sizes, leverage and trading costs you learn in this course decide your results.
Each account still has rules, all set out on the rules page. A challenge has a profit target, a daily loss limit and a maximum loss. The reward stage has no profit target, and both loss limits still apply. How it works explains the route from a challenge to the reward stage.
Check your understanding
You buy a CFD on 100 shares at $20.00 and close at $21.20. What is your result before costs?
A gain of $120. The price rose $1.20 and you held 100 shares, so $1.20 × 100 = $120.
You sell an index CFD at 7,500 with a size of $5 per point, and the index rises to 7,540. What happened?
You lost $200. You were short, so a rise works against you: 40 points × $5 = $200.
Can you trade options on CMC Funded?
No. The markets are forex, indices, commodities, shares, cryptocurrencies and prediction markets. Futures and options are not offered.
Key points
- A CFD pays the difference between your opening and closing price, times your position size.
- A long trade gains when the price rises, and a short trade gains when it falls.
- Leverage makes a small price move large compared with the margin you put up. Higher leverage magnifies both gains and losses.
- CMC Funded offers forex, indices, commodities, shares, cryptocurrencies and prediction markets, with no futures or options.
- Every CMC Funded account is simulated, and the maths of each trade works the same way.
Next lesson: Pips and lots: what a price move is worth in dollars
All trading is simulated. Rewards are based on performance and are not guaranteed.