Contract for Difference (CFD) Definition
A Contract for Difference (CFD) is a financial derivative contract between two parties, typically described as a “buyer” and a “seller”, wherein the seller will pay the buyer the difference between the current value of an asset and its value at contract time. If the difference is negative, then the buyer pays to the seller instead.
Contract for Difference (CFD) Key Points
- CFDs are complex instruments that allow investors to speculate on price movements, without owning the actual assets.
- The major concept of CFDs is allowing you to benefit from the change in the price of an asset (upwards or downwards).
- CFDs are typically associated with high level of risk due to the use of leverage, or borrowing, increasing both potential gains and losses.
- CFDs are often used for short term trading strategies and are not suitable for all investors because of their high risk.
Who uses a Contract for Difference (CFD)?
CFD trading is typically used by experienced traders and investors looking to speculate on the price of financial markets. These can range from individuals, financial firms, hedge funds, and investment management firms. Retail traders may also engage in CFD trading, but it is important to note that it involves a high level of risk and may not be suitable for everyone.
What is the Purpose of a Contract for Difference (CFD)?
The purpose of a Contract for Difference (CFD) is to allow investors to speculate on the price movements of an asset without actually owning that asset. This means that they can take advantage of prices moving up (long positions) or prices moving down (short positions). CFDs are a way for traders to take advantage of price fluxuations in various markets.
When is a Contract for Difference (CFD) Used?
CFD trades are commonly used for short-term trading strategies. They are generally used when traders want to take advantage of price fluctuations in a short period of time. CFDs are also used in hedging, which is a trading strategy designed to reduce risk exposure.
Where is a Contract for Difference (CFD) Traded?
CFDs are traded on a number of different platforms, including traditional brokerage firms and online trading platforms. They are also traded on various exchanges around the world, but it’s more commonly traded over the counter (OTC).
How Does a Contract for Difference (CFD) Work?
In a CFD trade, two parties agree to pay the difference between the opening price and the closing price of the contract. If the market price rises, the buyer will receive the difference from the seller, and vice-versa. This provides traders the opportunity to profit from price movements without having to own the underlying asset. CFDs also commonly involve leverage, allowing traders to control larger positions than what they could with their own capital.
