What Are CFDs?

The vast majority of retail investor accounts lose money when trading CFDs . You should consider whether you can afford to take the high risk of losing your money.
Contracts For Difference or CFDs are a popular method for trading in the financial market. Just like any contract, CFDs are created and implemented by more than one party. The first party, or the broker, offers the contract. The second party, or client, is an investor who agrees to take out the contract. This means, CFD is a contract in the financial market that allows one party to pay to another party. The payment is based on the difference of value of assets between the opening and closing of the contract. The second party or client gains profit if the price of assets moves towards favourable directions. Assets in CFDs can be stocks, commodities, or currencies.
Let’s Take A Look At An Example Of A CFD:
Let’s assume IBM stock is currently traded at £125 per share. You ask the broker to purchase 1,000 shares at £125 each. You need to pay £125,000 plus commission to buy 1,000 IBM shares. For every pound, the price of IBM stock goes up, you will gain £1,000 in profit. Also, for every pound it goes down, you will lose £1,000. This is the basic way of investing and also called as “buying the underlying asset”.
But with CFDs, you invest in IBM stocks in a different way. Instead of buying the IBM stock, with CFDs you only trade the price of IBM stock. In CFD’s, it’s stated that you will be paid £1,000 by the broker for every £1 increase in IBM stock or you pay the broker £1,000 for every £1 fall in stock value. With a CFD, you invest in IBM stocks without actually buying them. You just trade the values of the assets and you never own the assets, in this case, the stocks of IBM.
Why Choose A CFD
But, what’s the reason to choose a CFD, instead of buying assets directly? When you buy assets or commodities yourself, you need to pay 100% of the value.  In the case of investing in IBM stocks, you will need to pay £125,000 and commission to purchase 1,000 shares. Even for veteran stock market investors, it’s still a lot of money.
With CFD arrangements, you may need to provide only 10% deposit or £12,500 to the broker. If the IBM stock price goes up at the end of the contract, you get the deposit back along with the profit. If the stock price goes down, you will also get the deposit back, after being subtracted by the amount of loss. This type of investment is called “trading on margin” or leverage.
Contact CFI Financial
To learn more about investing in today’s global markets, contact CFI Financial today and speak with someone ho can answer any questions that you might have.
If you enjoyed this article, please feel free to share it on your favourite social media sites.