What are contracts for difference (CFD)

CFDs are classified as OTC financial derivatives that allow you to profit from changes in the price of various financial assets, including index futures, trade futures, cryptocurrencies, stocks, and exchange-traded securities.

Contracts for Difference is an abbreviation of the term Contract for Difference and is a simple, low-cost contract that allows you to trade a wide range of financial instruments by speculating on the difference in the value of the underlying trading instrument or security. A CFD deal lasts from the moment you enter it up until the moment you close it.


CFD contracts on Stocks

CFD contracts on stocks are a simple and convenient way to invest in the stock market in either direction. They reflect the prices of the official market and allow the investor to trade the stock market with leverage.

In addition, contracts for difference allow a trader with a LONG position to receive dividends (if any) from the securities to which the contract for difference is linked. In addition, they provide the right to take advantage of the GOVERNMENT ADVERTISEMENT as well as to participate in capital appreciation.

CFD trading methods

There are various strategies used when trading CFDs. They are simple enough, so they will be understandable even to novice traders. The most popular method is determining the long or short position.

Long position

In a long position, the trader buys the asset, as he expects price growth in the future. The high level of forecasting allows traders to receive a significant profit even with a small fluctuation in the price of the asset. The deals can be made on the basis of forecasts for both a month and a year.

Short position

A short position takes place when a trader anticipates that the value of the asset will fall and, accordingly, decides to sell it. But at the next stage, the trader may buy the same asset but at a lower price.

If the forecasted decline in the asset price is not justified, its value will not decrease, but increase, the trader will incur a loss on this position, the amount of which will be equal to the difference between the price of the asset at the opening and closing of trading. The opposite is also true: in case of a correct forecast, the trader will make a profit.

A short position allows the trader to make a profit during short (up to one minute) time intervals.

Margin requirements and leverage

CFDs are products that are traded on leverage. This means that the trader needs to pay only a portion of the total cost of the trade.

For example, if the margin requirement for CFDs on Eni shares is 5%, it is possible to trade with 1:20 leverage and, for example, buy Eni shares for 20,000 Euros using only 1,000 Euros in the form of margin requirements.

Contracts for Difference are derivatives (financial derivatives), which can be extremely risky because of the use of leverage. Therefore, they are only available to qualified clients with sufficient resources to trade this type of financial instrument.

What are the advantages of CFDs?

  • There are no commissions because you are not purchasing a physical (underlying) asset and you have no obligation to do so. A CFD is a contract between you and AVA.
  • Leverage trading. You need significant capital to physically buy the underlying asset. When you open a CFD trade, you pay ten times less. Remember, trading with leverage increases your profits, but when the market moves in the opposite direction, it leads to losses.
  • The margin required to support an open position when the market moves in the opposite direction is equal to the margin required to open a position.
  • CFDs are generally not subject to taxation. However, it depends on the tax policy of your country and several other factors.
  • CFDs do not lose their relevance over time and do not go out of circulation, as the market is dynamic: the upswing is usually followed by a decline.
  • Potential to hedge risks. If the trade does not go exactly as planned, open an equivalent reverse position.

Kevin Doran

I have been trading forex since 2015. Over the past few years, I have tried and tested all the most popular Forex Brokers. I publish my reviews to help you choose a reliable broker and reduce your risks.

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