CFD stands for Contract for Difference. CFD is an agreement between two parties to pay the difference between opening and closing price of a contract, thereby enabling a party to speculate on the movement of the price regardless of whether the price is going up or down. Since the trader will only be speculating on the price movement, he doesn’t have to own the underlying instrument. This also allows a trader in trading using a small amount to trade on a much larger position.
A trader opens a position and selects the number of CFDs he would like to trade and he will get profit from the market movement in his favour. If the trader chooses to buy, predicting an upwards market movement, he will benefit from increase in price of the chosen market. However, if the price of chosen market decreases, the trader in will incur loss in line with the market movement.
For example, if a trader thinks that the price of a product is going to rise and he buys 10 CFDs at the price of 10,000 -
CFD trading is available on various products such as shares, currency pairs, commodities and equity indices across various global markets.
CFD is a leveraged product. In order to open a CFD position on an account, trader needs to deposit an amount, which is known as margin. The margin that needs to be deposited mostly reflects as a percentage of the full value of the position. Margin trading allows a trader to trade on a higher value using a smaller amount.
Spread can be defined as the difference between the buy price and sell price of a particular instrument. Spread is one of the main costs in CFD trading, the tighter the spread the better for the trader.
CFDs allow short selling and hence one can potentially profit from falling market prices. A trader can use this method to balance the estimated loss, from physical portfolios owned, due to a sudden downward market trend.
For example, if a trader has a $1000 worth shares of a company and he foresees a sudden downward trend for the company, he can compensate the loss by short selling CFDs of the same company for $1000. This way, the losses can be negated and the trader doesn’t have to look to liquidate the shares.
CFD trading is best suited for investors looking for good return for their money. However, CFD trading has its own share of risks, as well. If you’re looking for a short term investment which gives a good return, CFD trading could be ideal for you. However, we suggest you to try the demo account before start trading on the real account.