A contract for difference (CFD) is an agreement between an investor and a CFD broker to exchange the difference in value of a financial product (securities or derivatives) between the time of the opening and closing of the contract. It is an advanced trading strategy used only by experienced traders. When trading CFDs (contracts for difference), you buy a certain number of contracts on a market if you expect it to go up, and sell them if you expect it to go down. The change in the value of your position reflects the movements of the underlying market.
With CFDs, you can close your position at any time when the market is open. With CFD trading, you do not buy or sell the underlying asset (e.g. a physical stock, currency pair or commodity). Instead, you buy or sell a number of units of a particular financial instrument, depending on whether you think prices will rise or fall.
We offer CFDs on a wide range of global markets, covering currency pairs, stock indices, commodities, equities and Treasuries. An example of one of our most popular stock indices is the UK 100, which aggregates the price movements of all the stocks listed on the UK's FTSE 100 index. A contract for difference (CFD) is a financial arrangement in which trades take place without ownership of the asset changing hands. Essentially, the buyer and seller are involved in a transaction based solely on the movement of the share price, not the share itself.
CFD trading is defined as "the buying and selling of CFDs", where "CFD" stands for "contract for difference". The value of a unit of the CFD you trade will depend on the instrument, so you will need to calculate the number of CFD units that best suits your trading strategy. The prime broker of a hedge fund will act as a counterparty to the CFD, and will often hedge its own risk under the CFD (or its net risk under all CFDs held by its clients, long and short) by trading physical shares on the exchange. This is also something that the Australian Stock Exchange, which promotes its CFDs traded on the Australian stock exchange, and some of the cfd providers, which promote direct market access products, have used to support their particular offering.
The counter argument is that there are many cfd providers and the industry is very competitive, with over twenty CFD providers in the UK alone. CFDs are usually traded with cfd brokers, but there are many cases where Forex brokers have started to offer CFD trading as well. In addition to this basic difference between CFD trading and share trading, there are several other unique aspects of CFD trading that are important to understand when considering starting this type of trading. For example, higher potential profits come with higher potential losses, while the way CFD brokers make profits from CFD traders is different from other types of trading.
If you want to maintain your exposure to the underlying stock beyond the expiry of the CFD, you will need to initiate a new position by taking out a new CFD. Find out everything you need to know to understand CFD trading, from what it is and how it works to short trading, leverage and hedging. One of the main advantages of cfd trading is that you can speculate on price movements in either direction, and the profit or loss you make depends on how accurate your forecast is. If you think Apple shares are going to fall in price, for example, you could sell a CFD on Apple shares.
So while you can mimic a traditional trade that profits when a market rises in price, you can also open a CFD position that will profit when the underlying market falls in price. CFD trading is leveraged, which means you can get exposure to a large position without having to commit the full cost up front.