Understanding and using CFD trading

The CFD, for Contract for Difference, is a derivative financial instrument whose gains are based on a difference. More precisely on the price difference of an underlying asset between the time of its sale and the time of its execution… Discover how the CFD really works..

The principle of CFD trading

The CFD involves a contract between a trader and his broker. One buys while the other sells. It is the acquirer who bears or pockets the difference between the cost of the asset between the time it is sold and the time the contract is performed. The seller wins the bet in case of a negative difference.

In concrete terms, the trader thus has the possibility of making a profit that is indexed to the variation in the price of an underlying asset (it can be a stock, a stock index, a currency or a commodity).

It is the trader’s responsibility to determine the opening time of a CFD contract. There is therefore no fixed expiry date, except in the case where the negotiation concerns a future contract associated with a specific expiry date. Generally speaking, the closing of the contract is decided by the trader: the gain or loss is then known by calculating the price between the opening and closing prices.


The advantages of CFD trading

Due to the specificities of the CFD, the trader can speculate on the price of a share without having to actually acquire it. As a result, it is a trading system that is accessible to everyone and that is fast to execute. Moreover, it is not necessary for transactions to pass through an intermediary (a stockbroker or a bank). Moreover, the trader can make profits even if the value of the assets falls. To the extent that trade is based on margins, the “risk – return” link can be controlled.

By trading CFDs, the trader does not have to invest in the shares that interest him. Nevertheless, he must pay a down payment or a margin to cover any losses. The amount corresponds to a proportion of the total value of the CFD. The costs are then lower than if you treat directly on the assets.

Ability to take a short position

In traditional trading (not via the Internet, but via traditional channels), taking a short position is rather complicated as not all brokers offer short selling. This is definitely not the case with CFDs. Thanks to this contract, it is quite possible to position yourself on a short deadline. Each trader can then speculate according to his needs. To start trading CFDs we advise you to use a broker like Plus500 with its wide range of contracts.