A CFD, or Contract for Difference, is a financial product that gives you exposure to an underlying instrument shares or commodities for example, without having to physically trade the instrument itself. As such, you are exposed to movements in the underlying value (quoted price) of the instrument.
For example, rather than buying gold futures at a low price and selling them at a higher price to make a profit which would involve putting up the full value of the futures, you are trading purely on the price movement (in either direction) of the quoted price for gold futures.
As its name suggests, a “Contract for Difference” is an agreement between two parties (investor and CFD provider) to exchange the difference between the opening and closing price of a contract.
CFDs allow investors to make assessments of rising and falling markets and to trade using margin, leveraging their position to a larger size than would otherwise be possible. They are available in 100s of markets for indices, commodities (e.g. gold, oil and natural gas), bonds and stocks (shares).
What are the other advantages of trading CFDs?
- Flexibility – size your positions to get exactly the exposure you want
- Out of hours trading
- Hold long or short positions – capitalise on bull and bear markets
- Leverage – trade “on margin” to maximise potential profits, with reduced outlay.