What are CFDs?

CFD trading stands for contract for difference and is a term used to describe a contract amongst two parties, usually termed a ‘buyer’ and a ‘seller’ to pay what is left between opening and the closing value of an asset at the time the contract ends. This can also result in the ‘seller’ paying the ‘buyer’ if the difference between the current value and the value at contract closing is negative. One of the biggest benefits of CFDs instead of futures is the fact that the contract can be sold or purchased back at any time for the price determined by the current stock market. Contract for difference contrasts to conventional share trading (this is where you pay the total amount of the value of the shares). The CFD method means that you make just a small payment (only around ten percent of the underlying asset worth) through your stock broker to make sure that you fulfil the requirements of the contract. This is termed the margin and it is necessary to maintain it at all times. If the market takes a turn for the worst and goes against you, you will be required to provide an additional sum of money to reinstate the original margin request.

Looking at CFDs as buying shares or an alternative asset by using a short term loan form a broker is probably the simplest way to comprehend the process. You pay interest on the amount of ‘loan’ that has been borrowed on rate for each day. When the contract is over you pay off any debts and are provided with the profits. As CFD trading is a leveraged trading process any profits are increased. However, it is a risk as the same happens to any loss made too meaning that you could stand to pay out more than the original margin.

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