Contracts for difference, otherwise known as CFDs, commonly refer to an agreement between two parties that permits them to trade on the price movements of various financial instruments.
CFDs are a well-favored method of derivative trading and allow the trader to speculate on the rising or falling prices of fast-moving global financial markets (or instruments) such as stocks, indices, equities, and foreign exchange. One of the key benefits of this form of trading is that the trader can trade on margin and can sell if they suspect that prices will go down or buy if they expect that prices will rise. There are fewer regulations and requirements within the CFD market compared to other standard exchanges.
This means that there are lesser capital requirements involved for a brokerage account and a trader can often open a CFD trading account with as little as $100 and trade values up to 10 times this amount by using leverage.
One of the biggest advantages of the CFD market for traders is that it easily allows the trader to take a long or short position. As the underlying asset or instrument is not physically settled, there are no restrictions on short selling, and no borrowing or shorting costs are incurred. Brokerage fees are often nil or extremely low as the brokers will earn their money through the spread.
Key takeaways:
- CFDs are cash-settled and a leveraged derivative that allows you to speculate on a variety of products with minimum restrictions and rules.
- CFDs have gained great popularity over the past 20 years and are among the most common derivatives available for trading.
- CFDs allow you to speculate on the price difference of an instrument and give traders the ability to go long or short with ease.