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An Introduction to Contract for Differences (CFDs)

Finance CFD Trading
Finance
Publish Date:   2021-09-21
Word Count:   333
Read Times:   2 Min
Read Count:  

Introduction

A contract for differences (CFD) is a financial contract that pays the difference between the open and closing trade settlement prices. CFDs are popular in FX and commodities goods since they allow investors to trade the direction of securities in the very short term.

How CFDs Work

CFDs are a flexible financial derivative instrument, that you can trade online, whether using your computer, cell phone, or tablet.

The principle of CFD trading is similar to that of stock trading, except that when you trade a CFD on a stock, such as APPLE, you are not actually holding the stock, but trading the price movement of the stock. If you think the price of APPLE will rise, you buy (i.e. take a long position). Conversely, if you think the price of APPLE will fall, you sell (i.e. short position) - taking profit from the falling price of the stock.

CFDs are traded on margin. This means that you only have to put in a partial amount to get the full value of your position. Since CFDs are leveraged products, they can magnify your gains or losses. Savvy traders can use guaranteed stops to control their trading risk, and even if the market is moving in the opposite direction to your position, you will still have a clear idea of the upper limit of your losses.

Pros and Cons

Advantages

  • High leverage
  • Global market access from one platform
  • Professional execution with no fees
  • No day trading requirements
  • Variety of trading opportunities

Disadvantages

  • Traders pay the spread
  • Weak industry regulation
  • Higher risks since CFD is fast-moving

Conclusions

It is feasible to profit from CFD trading. Trading CFDs, on the other hand, is a dangerous technique in comparison to other types of trading. Veteran traders with a depth of knowledge and tactical ability are the most effective CFD traders.

References

  1. https://www.investopedia.com/articles/stocks/09/trade-a-cfd.asp
  2. https://www.youtube.com/watch?v=9xejaUFeUoc
  3. https://corporatefinanceinstitute.com/resources/knowledge/finance/contract-for-difference-cfd/
Author: Yang Wang
Link: https://penguinwang96825.github.io/Yang-Tech-Blog/Yang-Tech-Blog/2021/09/21/2021-09-21-contract-for-difference/
Reprint policy: All articles in this blog are used except for special statements CC BY 4.0 reprint polocy. If reproduced, please indicate source Yang Wang !
Finance CFD Trading
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