CFD is a derivative financial instrument that allows investors to speculate on asset price movements without the need for ownership of the underlying asset. It simplifies the process of trading considerably and excludes the requirements of the acquisition of the assets.
CFD (Contract For Difference – a contract for the difference in price) is an agreement between two parties, typically described as buyer and seller, relating to the value of a particular asset. Under this agreement, the buyer will pay the seller the difference between the current value of an asset and its value at a given time in the future (at the moment of closing the contract) if the value of the asset decreases. If the value of the asset increases, the seller will pay the buyer. Thus, in a Contract for Difference transaction, the side which correctly predicts the direction of price movement gets a profit.
Invented in England, CFDs were initially applied to securities and have now become widely used, thanks to the possibility of avoiding certain taxes in some jurisdictions. Furthermore, CFDs became widespread among private clients as the trading process is substantially simplified and allows for the use of considerable leverage ratios that make speculative trading very profitable.
Using CFDs allows for trading of a considerable number of various financial instruments such as currencies, stocks, stock indexes, commodities, raw materials, metals, etc., and, as a rule such trading can be done from one account. The cost per trade with CFDs is much lower compared to real assets, leverage ratios are greater, the requirements are simpler, and traders can trade in any instruments such as futures, options, SPOT and so forth. As a rule, CFD contracts have a real basis and their price corresponds precisely to the basic asset price. TheProfit/Loss under an open contract is recalculated constantly and in real time and is displayed in your trading terminal.
One important advantage of CFDs is that you can trade in any direction; that is, you can open both long and short positions.