CFD(English Contract For Difference, CFD) is an agreement between two parties – the seller and the buyer on the transfer of the difference between the current value of the asset at the time of the conclusion of the agreement (opening a position) and its value at the end of the agreement (closing the position). Although the form of a contract for difference is very similar to a contract for the supply of goods, the seller is not required to own the real asset, and the buyer is not entitled to demand delivery. If between the first and the second transaction the price of the asset has increased, then the buyer will receive the difference in price from the seller. If the price has decreased, the seller will receive the difference in price from the buyer. Usually, the term of such an agreement is not set, and it can be terminated at the request of only one party to which such a right is granted.
In fact, CFDs are a derivative financial instrument on an underlying asset that allows you to receive income both on an increase and a decrease in the price of the underlying commodity or security.
For example, in relation to shares, a CFD is a derivative of a share purchase agreement, which allows speculation on the movement of share prices without the need to formalize the ownership of these shares.
CFDs were created in order to satisfy the requests of small capital stock speculators since only part of the funds from the value of the underlying asset must be deposited in order to buy/sell them (see margin trading). Thus, contracts for differences allow to significantly expand the scope of activities of individuals.
The CFD market was formed in the early 1990s in England and initially involved transactions for the conclusion of contracts for the purchase and sale of blocks of shares, but without ownership of these shares in order to avoid payment of stamp duty. At the moment, contracts for difference are also formed for the purchase and sale of basic commodities and financial instruments, as well as their derivatives.
What are CFDs?
CFD is an agreement on the exchange of the difference in the value of a specific asset from the moment the contract is opened until the moment it is closed.
Let's take a closer look: What are CFDs and how to trade them?
An interesting fact about CFDs is that you never actually own a particular instrument or asset that you choose to trade, but you still benefit from market movements in your direction.
From a technical point of view, this is because CFDs are a so-called derivative commodity, the value of which depends on the underlying asset.
If you are looking to trade CFDs, there are many brokers who can help you. They have different platforms that are designed specifically for CFD trading.
In this article, we will explain what a contract for difference is and under what conditions this type of trading is performed.
What are CFDs and how they work
By trading CFDs, you have the opportunity to profit from any market movement. If you are firmly convinced that the price of an asset will rise, you enter a buy position, which is often referred to as a long position.
If you think that the price of an asset will fall, you open a sell position, which is called a short position.
The actual market situation not only influences whether you receive an income or a loss but also determines its size.
For example, if you think that a particular market will go up, you buy CFDs to trade them.
Here is the answer to the question of what is CFD and how it differs from Forex.
The longer the market rises, the higher your profit will be, and conversely, the longer the market declines, the greater your losses will be. The opposite rule applies if you are betting that the market will fall – the longer the market falls, the more profit you will get, and if the market rises, you will suffer a loss.
It's no secret that with different brokers you can trade CFDs on a huge number of markets, including indices, stocks, Forex, commodities, cryptocurrencies, etc.
What is CFD on indices and what is CFD trading, we will look at later?
Let's find out further – CFD trading what it is and how it is applied in practice …
CFD trading what is it. What are stock CFDs?
For example, CFDs on stocks are trading very similarly to traditional stock trading, but they have additional advantages – cost and convenience.
You can also trade markets such as the stock index market using CFDs. This option is not available for direct trading. However, you should be aware that CFDs are leveraged and can result in losses that exceed your initial deposit in your CFD trading account.
Let's take a look at the buy and sell price. Let's take an example of these prices in each market from the position in which you see them in the main market.
Consider first the bid price (which comes first) and the bid price (which comes second). The difference between these two prices is called the spread.
If you predict the market will rise, you buy at the bid price (or even higher), and if you think the market will soon fall, you sell at the bid price (or even lower).
How do I calculate the profit and loss on my CFD account? It's actually very simple. The number of shares (or contracts, in our case) that you choose is entirely up to you.
You only have to adhere to the minimum size allowed for each specific market. You should remember that the value of one contract in different markets can vary.
For example, one contract on the FTSE 100 costs £ 10 for each point that the underlying index moves. Thus, if you go long on one contract, the FTSE 100 and the index will rise by one point.
This will mean that you will make a profit of £ 10. In the same way, one can assume that one full EUR / USD contract is worth $ 10 for every point of movement in that currency pair.
If you are going to short one contract on the EUR / USD pair, and the price rises by one point, this will result in a $ 10 loss for you.