CFD is the abbreviation of Contract for Difference. And that’s exactly what it is, a contract for the difference of the value of the underlying equity or security. Very simply put there are two parties, you the trader and the cfd broker or provider. You (the trader) initiate the CFD deal with your provider by buying long or selling short a certain security. The security can be anything such as stocks listed on the US Dow Jones or the Australian Stock Exchange or any currency traded in the foreign exchange (forex) markets. The dealer will charge you some sort of commission (for forex deals, they make money on the spread). The CFD is the agreement between the two parties that at the end of the contract (either brought about with you closing an open trade by buying or selling out of your position or by your broker liquidating your securities because of the lack of margin – called a margin call) both parties will settle the difference in the contract value between the opening and closing prices of the contract. (If you hold more contracts than one – which is usually the case, you then multiply the difference by the number of contracts you hold to find out your profit or loss).
A CFD is simple to use and trade, but is high in risk and I recommend that you read every tiny bit of small print to understand what you are getting yourself into – if you do choose to trade with CFD’s. Trading with CFD’s can be highly profitable, provided that you understand the risks, understand the principle of leverage can be a double edge sword, have a trading plan and are lucky.
Contracts For Difference (CFD) can be traded in a similar manner as ordinary stocks/shares. The prices quoted by CFD dealers are usually the same as the underlying market, and you can choose to trade any quantity just as you would with an ordinary stock. Again, you should be familiar with the distinct differences of CFD’s compared to normal shares by reading books, the product statement and by asking people. These leveraged instruments are fast becoming a popular way to speculate and profit on equity movements.