A CFD or “Contract For Difference” is a derivative product which allows you to trade on the price movements of assets and indexes across local and international markets. While being complex, what they offer traders is quite simple. CFDs enable you to enter the market with only a fraction of the value of the asset you are buying, amplifying the potential for gains and losses, also known as leverage. Because a CFD focuses on price movements it is also possible to short a product, meaning the trader expects the price of an asset to decrease and profit from this movement. Lastly they enable the trader to take a position without having to take ownership of the underlying asset. This makes CFDs ideal for traders who want to gain a larger market exposure for a fraction of the full value while being able to enter and exit trades quickly.

With CFDs you don’t have ownership of the actual assets. Rather, you exchange the price difference of the underlying asset, from the time that the contract was opened to when it is closed. This closing date or contract expiry date is not fixed, making CFDs different from other forms of derivatives, like futures. Your contract can be for the short term or continue for the long term

One advantage of trading CFDs is that you can speculate on price movements in any direction, up or down. The gain or loss that you make will depend on whether your forecast pans out. With CFDs, you can trade a large variety of assets, including currencies, equities, indices, cryptocurrencies (including bitcoin) and commodities.

How Does Trading CFDs Work?

To understand the whole process, you need to first know the concept of margin trading. Leveraged CFDs allow you to gain wide exposure to price movements, without needing to invest the total trade value. This means that leverage allows you to gain wider exposure to the market than what you could have done with the capital in your trading account.

Trade CFDs – What is CFD Margin?

Suppose the shares of XYZ Company are trading at $130 per share. You decide to buy 10,000 units of a contract at this price. Now, if you had to pay the total value of this contract, it would cost you: $130 x 10,000 = $130,000. By using leverage, you can gain exposure to the same number of shares, but with a lower capital investment. If the required margin is 5% of the total trade value, you will be required to pay only $6.50 per CFD unit, in your trading account as margin. So, your total margin requirement will be (0.05 x 130,000) = $6,500. This is significantly less than $130,000 but you get the same level of exposure, as if you had bought the shares directly. Plus, you are entitled to 100% of the gains. On the other hand, you will also bear 100% of any losses.