What is a CFD and How Does it Work

Let us say gold is trading at $2,000 per ounce. A standard gold contract on most exchanges represents 100 ounces. That means to trade one contract of gold the traditional way, you would need $200,000 just to get started.

Then there is the question of storage. Physical gold needs to be stored and insured. There are delivery logistics. There are exchange memberships required to access certain markets. There are geographical restrictions. The list of friction goes on.

Now imagine being able to trade gold, profiting from every move up and every move down, with a modest amount of capital, from your phone, with no storage, no delivery, and no exchange membership required.

That is what a CFD makes possible. And it is not just gold. The same applies to oil, the S&P 500, shares of Tesla, EUR/USD, Bitcoin, and over a thousand other instruments available on Navion Pro.

CFD stands for Contract for Difference.

Strip away the jargon and it is a simple idea. A CFD is an agreement between you and your broker. You agree that when you close your trade, whoever has made money on the price movement pays the other. If the price moved in your favour, the broker pays you the difference. If it moved against you, you pay the broker the difference.

You never own the underlying asset. You never need to. You are simply trading the price movement of that asset, nothing more, nothing less.

This is where CFDs become genuinely powerful and genuinely different from traditional investing.

When you buy shares of a company the traditional way, there is only one scenario in which you make money. The price goes up. If the price falls, you lose. You are entirely dependent on the market going in one direction.

With CFDs you can profit from markets moving in either direction.

In 2022 global stock markets fell sharply as central banks raised interest rates aggressively to fight inflation. The S&P 500 lost roughly 20% of its value that year. For traditional investors it was a painful year. For CFD traders who went short on indices, it was one of the best trading environments in years.

A falling market is not a problem for a CFD trader. It is just a different direction.

CFD trading is not free. There are three costs every trader needs to understand before putting real money to work.

The spread is the most consistent cost. As we covered in Chapter 2, every instrument is quoted with a bid price and an ask price. When you open a trade you transact at the less favourable of the two. The difference is the broker's fee for executing your trade.

The swap, also called the overnight financing charge, is applied when you hold a CFD position open past a certain cut off time each day, typically 5pm New York time. For traders who open and close positions within the same day the swap is irrelevant. For traders who hold positions for days or weeks it becomes a real cost that needs to be factored in.

Slippage occurs in fast moving markets, particularly around major news releases, when the price at which your trade is actually filled differs slightly from the price you saw when you clicked. It can work in your favour or against you but tends to be most significant during volatile periods.

Before CFDs existed, a trader who wanted exposure to currencies, gold, oil, and company shares simultaneously would have needed separate accounts with separate brokers or exchanges in separate countries.

With a single Navion Pro account you can trade all of these from one platform, with one login, funded once.

This matters more than it might seem. Markets are connected. When oil prices rise sharply, it affects inflation expectations, which affects what central banks will do with interest rates, which affects currencies, which affects stock markets. A trader who can only see one market in isolation is working with an incomplete picture. A trader who can see and trade across all of them simultaneously has a significant advantage.