Contract for Difference (CFD) is a contract between two parties, typically described as "buyer" and "seller", stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time (if the difference is negative, then the buyer pays instead to the seller). In effect, CFDs are financial derivatives that allow traders to take advantage of prices moving up (long positions) or prices moving down (short positions) on underlying financial instruments and are often used to speculate on those markets.
For example, when applied to equities, such a contract is an equity derivative that allows traders to speculate on asset price movements, without the need for ownership of the underlying asset.
If you believe that the price of the underlying asset is rising, you would open a "Long Position", meaning that in order to make a profit out of this trade, the price when closing the position should be higher than the opening price.
In contrast, if you think that the price of the underlying asset will be dropping, open a "Short Position", meaning that when closing the trade, the price should be lower than the opening price.
Factors that influence the CFD value
- Expiry time of the order
- Type of asset
- Market movements
- Value of order
- Volatility of the chosen CFD price
Why should I trade CFDs?
- When trading underlying assets you are not actually buying/selling them, so there are no additional borrowing costs and fees
- By opening Long and Short positions, your trading is a lot more flexible
- CFD trading allows you to take advantage of Leverage
- Maximise your profit potential by trading on both rising or falling market positions
Does CFD trading have any risks?
The main risk when trading Contracts for Difference is the global market itself. Successful traders have to understand the basics and follow the trends and news in order to be as efficient as possible. Most times you can predict the market movement even with no research but if you want to take it to the next level, knowledge of the global finance field is recommended.