A CFD – or contract for difference – is a financial product that gives you exposure to an underlying instrument e.g. shares or commodities without having to physically buy the product. As such, you are trading purely on movements in the underlying value (quoted price) of the product.
For example, rather than buying gold at a low price and selling it at a higher price to make a profit, you are trading purely on the anticipated price movement (in either direction) of the quoted rate for gold (typically in US dollars).
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/ leverage. They are traded in 100s of markets; in addition to cash and futures products, CFDs are available 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
- No stamp duty
- Hold long and short positions – capitalise on bull and bear markets
- Leverage – trade “on margin” to maximise potential profits, with reduced outlay. Remember leverage can also increase losses