What are CFDs and how do they work?

In this article, we will explain what CFDs are, how they work and what their advantages are.

A CFD is a contract between two parties, a “buyer” and a “seller”, which orders the seller to pay the buyer the difference between the current value of an asset and its value at the time of the contract. If the difference is negative, the buyer pays the seller instead.

Contract For Difference (CFDs) are financial derivatives and can be traded on forex, equities, commodities, stock indices and cryptocurrencies and can be used for both long and short.

CFDs have leverage or margin, which basically means when you have margin e.g. 20% so you can buy a stock that is worth $10,000 for $2,000.

So the advantage is that you execute the trade for 2000 USD but it behaves as if you bought for 10 000 USD, so if the stock goes up 100%, your profit will not be 2000 USD but 10 000 USD. Of course, the same applies if you are in a loss.

The main advantages of CFDs are therefore:

1) You have a wide choice of instruments

2) You can speculate on growth or sales without having to own that particular instrument

3) You have leverage

4) Very low transaction fees

5) Very fast execution of trades

6) You can trade most of them 24 hours/5 days a week