Investing 101: What is a Contract-For-Difference (CFD)?

I’ve mentioned before that exploring the world of investments is like walking into a toolshed full of power tools and equipment. While most of us could reasonably get by with just screwdrivers or Allen keys, some of us might want more than just the basic tools. 

When we move to power tools, our efficiency in accomplishing a task is increased. At the same time, the damage caused if used improperly is also magnified. Even if we are not planning to use a particular tool, it’s always good to know what they do and be aware of the potential dangers of such equipment. 

Contract-For-Difference or CFD, is one such tool that is best used by those who are more experienced.

What is a CFD?

A CFD is a financial derivative that allows traders to gain a larger exposure to an asset like a stock  with a relatively small capital outlay. It is ideal for those who wish to magnify their profits from the price movement of a particular asset. Of course, on the flip side, losses are also magnified. This is called leverage, and it can be as profitable as it is risky.

This is how it works: let’s say for some reason I’m quite certain that the new iPhone launched by Apple this year would be the best thing ever invented, leading to new record profits for the company. If I had just US$900, I could buy perhaps just 4 Apple shares at its current US$225 share price. Should Apple shares appreciate sharply to US$250, I can then sell off my shares and make a US$100 profit. Neat, but it’s barely going to pay for a month’s worth of cai fan, especially if I order fish to celebrate the occasion. 

With CFDs, you’re not buying the actual shares of Apple, but speculating on the price movement. If you use a leverage of 10:1, for every US$900 you put in, you could be controlling US$9,000 worth of stock. In this case, if Apple’s share price does indeed go up by US$25, you will be making US$1,000 profit. That’s a lot of fish.

Leverage Can Be Very Risky 

It should go without saying that the reverse is true: when Apple goes down by US$25, someone using US$900 to buy 4 shares of Apple will lose US$100. Someone using a leverage of 10:1 will lose US$1,000 – that’s even more than the starting capital. Essentially, you are subject to profits and losses on the whole leveraged value rather than just your capital. 

Also, you need to maintain a certain amount of money to keep your positions open. This is called a margin requirement and it depends on the asset you are investing in as well as the broker you use. For popular stock indices, IG has a 5% margin requirement. This means that for every $10,000 of position, you need to have at least $500 in your account to keep your position opened.

In times of adverse market movements, your broker might increase the margin requirements to ensure you are able to cover your positions. This is what a “margin call” is, and if you are unable to make up the margin requirements, your positions will be closed.  Since it’s due to market declines, you will likely suffer losses. 

Mitigating the Risks

This is why I liken CFDs to power tools that can help you with tasks difficult to achieve with normal equipment, but can severely harm you in certain scenarios. The key to using such tools is to be aware of how to manage the risks.

While leverage can amplify profits, it can also magnify losses so we have to be aware that losses can exceed our starting capital particularly if our leverage is high. It’s essential to approach CFDs with a clear risk management strategy to mitigate the risk and maximise rewards. This includes setting stop-loss orders, limiting the amount of capital at risk, and not overextending our position sizes. Just like any powerful tool, the key is to handle CFDs with respect and caution, ensuring that we have the knowledge and discipline to mitigate potential downsides.

My philosophy when it comes to CFDs is similar to credit cards – use them responsibly and with a clear understanding of the risks. Just as you wouldn’t max out your credit limit without the means to pay it off, you shouldn’t engage in leveraged trades without a solid strategy and the ability to cover potential losses. Both tools can offer convenience and opportunities, but they require discipline and careful management to avoid financial pitfalls.

If not, just like how someone who cannot handle credit well should steer clear of credit cards, those who can’t wield CFDs properly should avoid it as far as possible.

Having the Right Platform Helps, Especially For Beginners 

For those who wish to explore more, picking the right platform can help. To be honest, I was quite hesitant when IG proposed sponsoring this article because leverage trading is something that can be very risky especially if you are not sure what you are doing. Well, not only has IG engaged me to write this as an educational piece about CFDs and its platform, it also has plenty of resources for beginners and more advanced users alike.

Moreover, you can create a demo account and practise trading with $200,000 of virtual funds without risking a single dollar of your own. This allows you to get a feel of how CFD trading works before you decide whether to start a live account. If not, you are free to toy around with virtual trading just for the fun and experience of being a CFD trader without having to put up any money at all. 

At the same time, you will get access to exclusive educational content from IG Academy, IG’s range of resources for novice, intermediate and advanced users. This includes informative videos teaching you everything from currency trading to simply using the IG app. They also have webinars and training sessions you can join absolutely free of charge.

Free Signals and Guaranteed Stop Loss Orders

For those who require more advanced features, IG offers free signals provided by PIA-First and Autochartist on CFDs. When significant trends or patterns arise, the Signal Centre will provide real-time trading ideas that you can look into for potential opportunities.

Trading signals are provided on forex, indices, and commodities. While they are not investment advice and you should be aware that any trade is done at your own risk, such a feature can take out quite a bit of effort from your analysis. With continuous market analysis done for you, you can free up your time for other things in life. 

Another feature one can use for risk mitigation is having a guaranteed stop. A guaranteed stop, as the name suggests, will be executed exactly where it’s specified. This is particularly useful in very volatile conditions where regular stop-loss orders may not be able to protect your downside risk. IG provides guaranteed stop loss orders which only incur fees when triggered. 

Sign-up Promo

Of course, you’ll receive goodies for signing up – up to S$888 is up for grabs. S$50 is given when you start your new CFD account, fund just S$2,000, and perform your first trade. Again, please proceed with caution and remember that leveraging is something that can be very risky.  

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Disclaimer
IG provides an execution-only service. The information in this article is for informational and educational purposes only and does not constitute (and should not be construed as containing) any form of financial or investment advice or an investment recommendation or an offer of or solicitation to invest or transact in any financial instrument. Nor does the information take into account the investment objective, financial situation, or particular need of any person.  The content shared is based on personal opinion and experience only, and the views do not necessarily represent those of IG.  Where in doubt, you should seek advice from an independent financial adviser regarding the suitability of your investment, under a separate arrangement, as you deem fit. While we strive to provide accurate and relevant information, we cannot guarantee the accuracy or completeness of the information contained in this article. No responsibility is accepted by IG for any loss or damage arising in any way  from anyone acting or refraining from acting as a result of the information.  Please note that the author may receive compensation from IG in connection with this article. All forms of investment carry risks. Trading in leveraged products, such as CFDs, carries risks and may not be suitable for everyone. Losses can exceed deposits. This advertisement has not been reviewed by the Monetary Authority of Singapore.

Seth Wee was a licensed financial adviser representative from 2009 to 2025, with over 16 years of experience in Singapore’s financial advisory industry.

He started Sethisfy.com in 2019 to share practical insights on credit cards, banking products, and miles strategies, helping readers identify financial products that deliver the best value. Seth has been featured in CNA, Channel 8, Today, and a host of other publications. In 2025, he was also part of a panel at CPF’s Ready For Life festival.

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