What is a CFD?

What is a CFD?

CFD stands for Contract for Difference. A CFD is a type of derivative, meaning that the price of a CFD is derived from the value of another underlying asset, such as a stock or an index. A CFD can normally be related to any financial instrument.

Most leverage trading is done through derivatives. With a derivative contract you never directly own the underlying asset, but you do have a financial interest in its performance.

Rather than trading the underlying asset itself, a CFD is a contract whereby two parties agree to exchange money according to the change in value of the underlying asset between the time the contract is opened and when it is closed. Simply put, with CFDs you trade the difference between the opening price and the closing price of an underlying asset. In this agreement one party is the buyer (of the value of the underlying asset) and the other party is the seller. The buyer makes money (of the seller) if the value of the underlying asset increases and loses money (to the seller) if the value decreases. Conversely, the seller loses money when the price of the underlying asset increases and earns money when the price decreases. In this way, you can even make money in falling markets.

When you buy an underlying asset in the traditional way, you generally have to pay the full purchase price up front: the total value of the shares, currency, bitcoin, gold or other products you are trading. However, some brokers offer leveraged trading, meaning that you only have to pay a fraction of the value of your position up front. In effect, the broker lends you the rest of the purchase price.

Simply put, CFDs are a means of gaining exposure to the change in value of a financial instrument without owning that instrument.

Leveraged products are financial products that carry the risk of capital loss. In the following article you can read more about risk management in trading.

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