Articles, Forex, Stocks

A Contract for Difference or CFD

A CFD on a stock, commodity or currency pair is a Contract for Difference on that tradable asset. Contracts for Difference are an increasingly popular derivative financial product class that have their value determined by the price of an underlying asset or an exchange rate.

CFDs are a derivative financial product because their value is derived from the price of an underlying asset traded in the financial or commodity markets.

The name arises because the actual underlying asset does not change hands. Instead, only the difference in price between when the contract is initiated and closed out, multiplied by the contract amount, is settled between the counterparties.

How to Trade CFDs Online

In the past, CFDs were traded with a broker over the telephone after they had placed indications on Reuters pages. These days, you can trade a CFD much more conveniently right from your Internet-connected computer using an electronic trading platform provided by an online CFD broker or provider you have opened an account with.

Popular and well established CFD providers include Plus500, CityIndex, and Capital Spreads. Visiting their websites should provide you with all the details you need to know about how you can open an account to start trading CFDs online.

These CFD providers all have an extensive list of financial and commodity products that they offer CFDs on. Markets that CFDs are commonly offered on include: stocks, indexes, commodities, currency pairs, interest rates and bonds. Visit each broker’s website to get comprehensive information on exactly what CFDs they offer and on what terms, as well as to open an account.

CFDs on Stocks

Stock traders interested in dealing stock CFDs can use them as an alternative to trading a stock directly.

If you wish to trade particular stocks, you can also find out whether a broker offers CFDs on a stock you are interested in by browsing their products web page.

You can also search for “(Stock) CFD” where (Stock) is the name or ticker of the stock you are interested in trading.

Advantages of CFDs

CFDs are especially convenient to trade because they allow you to take leveraged positions in the stock, index, commodity, foreign exchange, interest rate or bond markets.

Traders are basically able to profit from taking a view in these markets without having to deal with the hassle of accepting delivery of the underlying asset, commodity or currency pair and the various risks involved in having to store the underlying asset safely.

This notable advantage has made CFDs the product of choice for many smaller speculators to trade in the financial and commodity markets, especially those foreign or highly regulated markets with restrictions that might prevent easy market access or timely execution.

Using CFDs also shines relative to using futures or OTC markets in cases where taking delivery is highly inconvenient for the trader. Nevertheless, CFDs may not be available in your country, so check local rules.

CFD Trading Platforms

CFD brokers usually provide an electronic dealing platform for CFDs so that you can execute CFD transactions directly from your personal computer as long as it is connected to the Internet.

Some CFD providers even offer mobile phone trading solutions so that you can deal and check prices on CFDs from your smart phone or mobile device while on the go.