What is a CFD (contract for difference)?

A CFD is a financial instrument between a buying party (long) and a selling party (short), in which one party is obliged to cover the difference between the final price and the initial price. This difference represents a profit for the other party. Contracts of this type are also called contracts for difference or contracts for difference. An important feature is also that the contract is executed on a specific date and relates to a strictly defined asset (for example, currencies, stocks, commodity prices or raw materials). An important feature of CFDs is the frequent use of leverage, leverage, in their construction.

One of the most popular markets using CFD instruments is Forex.

 

What is CFD trading?

CFD trading is, in practice, the opportunity to sell a specific asset, on a given date at a predefined price. Trading with CFDs, we have the opportunity to earn either when the price of an asset increases (when we take a long position) or when the value of the asset decreases (when we take a short position).

What is leverage and is it worth using?

Leverage or leverage is a common characteristic of contracts. Their design allows us to make profits in proportion to the leverage higher in case we took the right position. At the same time, the potential losses are also higher. For example, entering into a contract with leverage of 1:10 for PLN 1000, our position behaves as if we had invested PLN 10000 without leverage.

Why are CFDs so popular?

CFDs owe their very high popularity primarily to their relatively simple construction and very high availability. At the same time, for many investors it is very tempting to buy given assets using high leverage.

Advantages of CFDs

Among some of the most important advantages of CFDs is the ability to trade with leverage. Also important is the fact that conctrates of this type, is one of the easiest ways to make money when the price of an asset falls.

Disadvantages of CFDs

Although leverage, is one of the advantages – it can also be a serious disadvantage of CDF contracts. Inappropriate and timid handling of highly leveraged financial products involves very high risks for the investor.

What does CFD mean?

CFD is an abbreviation for contract for difference – simply meaning contract for difference.