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Contract for Differences

What is a Contract for Difference (CFD) ?

A contract for difference (CFD) is a contract between a buyer and a seller that stipulates that the buyer must pay the seller the difference between the current value of an asset and its value at contract time. CFDs allow traders and investors an opportunity to profit from price movement without owning the underlying assets.

Key Takeaways

✓ A contract for differences (CFD) is a financial contract that pays the differences in the settlement price between the open and closing trades.
✓ A contract for differences (CFD) is an agreement between an investor and a CFD broker to exchange the difference in the value of a financial product between the time the contract opens and closes.

Understanding Contract for Differences

CFDs allow traders to take advantage of the price movement of the underlying assets such as foreign exchange, cryptocurrencies, commodities, energies, precious metals, futures, indices and shares.

CFDs provide investors with all of the benefits of owning a security without physically owning it. CFDs allow investors to easily take a long or short position or a buy and sell position.

What are the CFDs ?

Contracts for differences (CFDs) are contracts between investors and financial institutions in which investors take a position on the future value of an asset. The difference between the open and closing trade prices are cash-settled. There is no physical delivery of goods or securities.

How Do CFDs Work ?

A contract for difference (CFD) allows traders to speculate on the future market movements of an underlying asset, without actually owning or taking physical delivery of the underlying asset. CFDs are available for a range of underlying assets, such as foreign exchange, cryptocurrencies, commodities, futures, indices and shares provided by FxPro.

Is Trading CFDs Safe ?

CFD trading can be considered safe as a result of group factors that the trader must take into account, including industry regulations, liquidity, margin requirements, transaction volume and leverage.

The Bottom Line

CFD trading includes some advantages such as lower margin requirements, easy access to global markets without shorting or daily trading rules, a tight spread and little or no fees. In fact, the European Securities and Markets Authority (ESMA) has placed safe limitations on CFDs to protect individual investors.

Section: Forex Guide
Published: 23.04.2022
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