A contract for difference (CFD) is a type of financial instrument that allows investors to speculate on the future value of an asset, such as stocks or commodities. CFDs are often used by traders who do not want to invest in assets but still want exposure to the fluctuations of their prices.
For example, if you purchase a stock CFD for $5 and the price goes up to $1, then your profit would be $4 ($5 – $1). However, if you purchased ten shares at the same time, your profit would be just $2 ($10-$8).
The main advantage of using CFDs is that they allow investors to leverage their trades with lower capital requirements than investing in securities outright. This way, even small movements of prices can result in significant gains or losses.
Moreover, they are not regulated by the Securities and Exchange Commission (SEC). For this reason, it may be more expensive to trade with a broker who specializes in CFD trading than one who specializes in traditional securities.
The Final Word
How it works is that you are able to trade CFDs by speculating on the future price movements of an underlying asset. With this type of contract, you make a series of payments to your broker equal in value to the difference between current prices and their original levels, along with any later costs or profits incurred during the process.