Contract for Difference (CFD) Definition
A Contract for Difference (CFD) is a financial derivative that allows investors to speculate on the rising or falling prices of fast-moving global financial markets (or instruments) such as shares, indices, commodities, currencies, and treasuries. It is a contract between an investor and a CFD broker to exchange the difference in the value of a financial product (securities or derivatives) between the time the contract opens and closes.
Contract for Difference (CFD) Key Points
- CFDs are derivative products that allow investors to trade on live market price movements without actually owning the underlying instrument on which the contract is based.
- They offer the ability to leverage, meaning you can gain exposure to a large amount of an asset without having to commit the full investment needed to own the actual asset.
- CFDs are traded on margin, meaning you only need a small deposit to open your position rather than having to invest the full value of the trade.
- CFDs are typically used for short term trades.
- CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
What is a Contract for Difference (CFD)?
A Contract for Difference (CFD) is a popular form of derivative trading. It’s a contract between a trader and a broker where the trader can speculate on the rise or fall of prices of various financial instruments. The “difference” in the contract for difference refers to the change in price of an asset from when the contract is opened to when it is closed.
Why is a Contract for Difference (CFD) important?
CFDs are important because they allow investors to speculate on price movements without owning the underlying asset. This can provide opportunities for profit in both rising and falling markets. They also offer the ability to leverage, which can increase potential returns (or losses). However, it’s important to note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
Who uses a Contract for Difference (CFD)?
CFDs are used by a wide range of individuals and institutions. This includes retail investors, professional traders, and financial institutions. They are particularly popular among short-term traders and speculators who are looking to profit from price movements in the short term.
When can a Contract for Difference (CFD) be used?
CFDs can be used whenever the markets are open. They are typically used for short term trades, often held for just a few days or weeks. However, they can also be held for longer periods depending on the trader’s strategy and the market conditions.
How does a Contract for Difference (CFD) work?
When trading a CFD, you agree to exchange the difference in price of an asset from the point at which the contract is opened to when it is closed. If you believe the price of a particular asset will rise, you ‘buy’ or ‘go long’ on a CFD for that asset. If you believe the price will fall, you ‘sell’ or ‘go short’. If your prediction is correct, you will make a profit, and if not, you will make a loss. The size of your profit or loss will depend on the extent of the market movement and the size of your position.
