A contract for difference (CFD) represents a binding contract between a buyer and a seller that requires a buyer to pay the seller the difference between the current value of a security and the value it reached at contract time.
CFD is a derivative product that allows traders to speculate and try to profit from an asset’s price movements without actually owning the asset. With CFDs, traders can buy assets from multiple financial markets including stocks, forex, indices, and commodities.
It is important to understand that the value of a CFD does not represent the value of the underlying asset but rather the price difference between the trade’s entry and exit points.
In order to trade CFDs, traders must start a contract with a broker, rather than going through a specific stock or forex exchange. Trading CFDs is an advanced investment strategy and is typically implemented by experienced traders.
Just like with other securities, investors trade CFDs based on their price movement expectations. If a trader expects a CFD to appreciate over time, they will buy the CFD, while those who anticipate price depreciation will sell an opening position.
If the price of a CFD rises, the trader would then sell their CFD and the net difference between the buy price and the sale price represents their profit.
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