This section will explain what a Contract for Difference (CFD) is and elaborate more about what you need to know about the world of CFDs. CFDs are relatively new to the financial world and their popularity is growing. CFDs are a way of trading the price movements of global financial markets without buying or selling the underlying instrument directly. In its basic form, a CFD is a contract between a buyer and a broker to pay the difference between the current price of an asset and the final price at the end of the contract time. If the price of the contract goes up, the buyer “wins” and the broker pays the difference. If the price of the contract goes down, the buyer “loses” and the broker gets paid the contract difference. CFDs can be created to track the price of various assets around the world, including shares of stock and global indices, allowing traders to speculate on various markets.

Difference from Other Financial Products

Trading Overview

Benefits Overview

CFDs are appealing to traders due to their simplicity, lower trading costs and flexibility. Traders can purchase contracts speculating on shares, commodities or other financial items with a few clicks on their computers. CFD trading costs are usually lower than other financial tools. The trading fees, commissions or overnight charges, and spreads tend to be lower than trading the underlying assets directly. Unlike other financial instruments, CFDs offer traders an almost unprecedented choice of markets and a global reach.

Nuances to Remember About CFDs

While trading CFDs is not difficult, there are some aspects of contracts for difference that you should understand. This section will cover some important points that you should remember about CFDs.

When trading CFDs, be aware of the trading costs. While share CFDs are very similar to trading the shares themselves, other types of CFDs involve slightly different cost considerations. Those types of CFDs involve overnight rollover charges and a spread, which is a small fee that brokers charge for the trade.

Some of the appeals of CFD trading are its simplicity and cost savings. Unlike trading the underlying assets themselves on an exchange where investors are restricted to buying in certain increments or minimum amounts, CFDs are more accommodating.  The minimum trade size for CFDs is usually 1. This means that you can create a contract for difference for 1 share of Apple or 1 share in S&P 500. However, commodity CFDs are slightly different and contract minimums can vary. Regardless, the minimum size of those commodities when trading CFDs is smaller than they would be if trading those commodities on an exchange.

Margin and leverage are important concepts to keep in mind when trading CFDs. Margin is the percentage amount a trader needs to deposit into his trading account to control a larger amount of money. Smaller margins mean the trader has more leverage. When trading stocks, a $100 account can purchase $100 worth of shares. However, a $100 CFD account with 10:1 leverage can allow a trader to control up to $1,000 worth of assets. While this can greatly increase profits, it can also lead to greater losses.