What is CFD (Contract for Difference) and How CFD Trading Works?

The term CFD stands for Contract For Difference. A CFD, related to the Finance, is an agreement between two parties (Seller & Buyer) where the difference between the opening and closing price of a contract is exchanged. The difference between where a trade is entered and exited is the CFD. Slightly different from the traditional share trading, A CFD is becoming popular day by day. CFDs were first developed on the London Stock Exchange in the 1980s by market maker Smith New Court. In CFDs, People invest less for making a big amount of money. Traders are not worried about the market because they still gain their money if the market price falls.

Why Traders Prefer CFDs over Traditional Share Trading?

-One doesn’t need to own the asset which is being traded.

-CFDs provide much higher leverage. One can make a healthy amount of money with relatively small amounts of initial capital.

-One doesn’t need to pay stamp duty.

-One can access thousands of available markets.

-Unlike conventional shares trading, CFDs allow you to go long (Take advantage of rising prices) and short (Take advantage of falling prices).

-No traditional rules that stop you from shorting at certain times.

-Not a big account size is required to open an account. One can open with as little as a $1000.

-Several trading options are available such as currency, commodity, index.

The way CFD trading works-

-Choosing the market is the initial step. Relevant information is available in the portal.

-There are two types of CFD prices: The Sell Price & The Buy Price. One can open a short CFD with the sell price. On the other hand, a long CFD can be opened with the buy price. Both the prices differ on the basis of the current market price.

-One needs to decide on how many units he wants to trade.

-One can close his position if things aren’t going well.

-There is no fixed duration. One decides exactly when he wants to close his position.

-Once trade is placed, one can monitor the whole process. 

Thank You.

Kaisar Hamid