A contract for difference (CFD) is a derivative and its price is based on the underlying market price of an asset, such as an equity, a commodity or an index. CFDs are traded between individual traders and CFD providers. Any positions that are left open from one trading day to the next will be charged a certain overnight fee, also known as a ‘rollover’.
With CFDs trading, you trade on the change in an asset’s value, without ever actually owning that asset.
A CFD gains or loses value as the difference between the price of the underlying asset when you buy the CFD and the current price fluctuates.
Unlike straightforward equity trading, CFDs are a leveraged product. When trading, therefore, you provide only a small deposit to access a larger portion of the market. Please bear in mind, however that although leverage may enhance your profit if the trade goes your way, it can also lead to far greater losses if the trade goes against you.
CFDs are not permitted in the United States, due to U.S. Securities and Exchange Commission restrictions regarding over-the-counter (OTC) financial instruments.
There are a number of reasons to trade CFDs.
As you are trading with leverage, you can benefit from short-term fluctuations in the price of an equity or an index. Small fluctuations in the market, therefore, can yield profits. Leverage can also help you trade in equities that you may otherwise not be able to afford, as in our example listed above.
You can trade in a variety of instruments that are listed on a number of different international markets from one account.
By trading from one account you can price in charges and commissions, which vary from market to market.
As a CFD is based on the price difference, you can easily take advantage of short selling in a falling market.
You need to use the power of leverage wisely. On the one hand, if a trade is going to your advantage, you stand to make a nice profit for a small amount of money. However, if the trade goes against you and if you are using high leverage, then even a small fluctuation in price difference can put you out of the trade.