What Is CFD and What Is the Opportunity?

The CFD or Contract for Difference represents a financial contract between two parties. One party is a “buyer” and the other a “seller”, which means that the seller will pay the buyer the difference between an underlying asset’s price and its value in some specific moment in the future. If the difference is negative, the seller profits from the difference in price. CFD is a derivative financial product that allows you to bet on an asset’s upward or downward trend. It’s an excellent way to diversify your investment portfolio. Discover how to start trading CFD and what are the benefits from it.

Types of CFDs

Depending on the type of asset, we have different types of CDFs. The underlying assets can be a stock, index, commodity or currency.

When it comes to currencies, we are talking about trading in the Forex market with CFDs.

CFD has similarities with forex, which consists of similar pricing and trading methods.

It’s also possible to trade CFDs on stock exchange markets, such as the CAC 40 or other stock market indices. If the underlying is stock, then the contract is an equity derivative that allows investors to speculate on stock price movements without acquiring ownership of the stock.

CFDs are also available for trading in gold, silver, oil or any other commodity in the financial markets.

How to trade CFD?

The value of a CFD accurately reflects the price of the underlying asset.

There are two ways to trade on a CFD:

Supposing that the underlying value of the CFD will increase, then we position ourselves as a buyer on a CFD. Then we sell this CFD a few times later to make a profit if the underlying asset’s price has actually risen.

If you predict that the price of the underlying asset will drop, you sell that CFD short. Here we talk about a short trading position. Then we buy this CFD a few times later to make a profit if the underlying asset’s value has dropped.

Once the purchase and sale have been made, the position is closed. 

CFD are open-ended contracts meaning that they do not have a deadline. You can therefore keep a position without a time limit and choose the moment for trading.

CFD trading also allows you to benefit from the leverage effect, meaning that you can take a position for an amount greater than the sums actually available in your account. The leverage allows you to multiply your gains but also exposes you to the risk of increasing your losses and even losing more than the money you put in your account at the start. 

Where can you start trading CFD?

CFD trading is at the disposal of individual traders through specialized brokers’ services and their online trading platforms. Brokers charge commissions on each transaction. The commission price may include the spread or even a maintenance margin for traders holding long positions. It is possible to buy or sell as many CFDs as you want.

If a position remains open beyond a trading day, the account is updated automatically on a daily basis. Thus, if your investment is a winner, the broker pays the sum corresponding to the day’s profit into your account. Otherwise, the broker will deduct the amount corresponding to the daily loss from your account.

As a trader, you can diversify your portfolio using CDFs when the market is too volatile. Because of the low margins, it’s a good way to find new trading opportunities. One of the best advantages of trading CFDs is the possibility of trading in various markets from just one account. You can trade whatever asset you choose from across the globe – Asia, Europe, United States and many more.

James Lang

James is the Editor of Small Business Sense. His background includes freelance ghostwriting about things that impact SMEs, startups, freelancers and entrepreneurs. He hasn't had a boss in more than six years, and hopes his content will help you fire yours.