The Mechanics of Equity CFDs: How They Work

Equity CFDs offer investors a capital-efficient way to gain exposure to a specific value and price direction as they trade on margin with a leverage effect. Do not confuse Equity CFDs with equity swaps, although there are similarities—such as the ability to potentially profit/loss from price movements without purchasing underlying instruments.

The main difference is that equity CFDs can be used for several instruments:

• Currencies
• Stocks
• Commodities

Key Features and Characteristics of Equity CFDs

1. Price Tracking of Underlying Equity

Equity CFDs allow you to track the performance of an underlying market security. Your potential profit or loss is calculated based on the difference between the purchase and selling price. When you trade share CFDs, the spread is usually the same as the spread of the underlying security. This is called the bid and ask price when trading shares.

Brokerages typically base their equity CFD prices on the underlying instrument and only charge fees such as market spread, commission, and daily interest for holding long positions overnight.

2. Leverage and Margin Requirements

Equity CFDs allow you to trade on margin, which means you only need a small amount of money compared to the total value of the position. You can now trade equity CFDs on most global equities.

You can trade contracts with a minimum size of one share, and the trading hours typically align with those of the underlying exchange.

3. Long and Short Positions

You can easily take a long or short position in the CFD market, which typically does not have short-selling rules. There’s also no borrowing or shorting cost since you, as an investor, don't technically own the underlying instrument.

Trading CFDs usually involves minimal fees, as brokers earn money from spreads. When buying, the trader pays the asking price; they take the bid price when selling or shorting. Brokerages take a portion of the potential profit from each quoted bid and asks price.

4. No Ownership of the Underlying Instruments

Let’s talk about ownership. With CFDs, you generally do not own or have ownership rights of the shares. Rather, you agree with the CFD provider to exchange a transaction's potential profit or loss. This means that although you hold a CFD related to a share, you do not have ownership or voting rights for the underlying share.

Equity CFDs, however, afford you the same rights as the owner of the underlying shares. This means you can receive cash dividends and be involved in stock splits, rights issues, or corporate takeover action—even if you don’t own the underlying shares.

» Are there trading terms you don't understand? Check out our helpful glossary for a quick explanation.

Why Do People Trade Equity CFDs?

Access to a Wide Range of Equities

CFDs provide investors access to a wide range of global equities in the UK, U.S., and European markets without owning physical shares. This allows you to trade with the stock movements without buying the underlying instrument.

Leveraged Exposure to Price Movements

With Equity CFDs, you can trade on leverage. For instance, you can take a position by depositing only 20% of the required capital, making trading more capital efficient. While this could lead to higher potential returns, it could also amplify the potential losses if the position moves in a direction you weren't expecting.

Option to Trade With the Rising and Falling Prices

You can either go long or short, trading on rising or falling prices. Unlike regular stock trading, where investors can only invest in rising prices, many brokerages do not permit short-selling.

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Start Trading Equity CFDs


Equity CFDs offer investors exposure to the stock market with minimal capital outlay and leverage. However, there is risk involved and it's crucial to understand how these contracts work before you decide to start trading.