CFDs are a leveraged product
Leverage gives you exposure to the markets by depositing just a percentage of the full value of the trade you wish to place. This means that while you could make a potential profit if the market moves in your favour, you could just as easily make significant losses if the trade moves against you and you don't have adequate risk management in place.
For instance, if you place a CFD trade worth £1,000 and the margin rate for the applicable tier is 5%, you only need to fund 5% of the total value of the position, known as position margin. In this case, you only need to allocate £50 to open the trade. If, however, the price of the instrument moves against you by 10%, you would lose £100 – double your initial stake in the CFD trade. This is because your exposure to the market (or your risk) is the same as if you had purchased £1,000 worth of physical shares. This means that any move in the market will have a greater effect on your capital than if you had purchased the same value of shares. However, retail client accounts have negative balance protection, so your losses will be limited to the value of the funds in your account. Learn more about calculating CFD margins here.