A Contract for Differences, commonly known as CFD, is an agreement where the difference in settlement of a financial derivative’s open and close prices is resolved with a cash settlement. CFDs exist for multiple assets, including stocks, indices and commodities, although no delivery of actual goods or securities happen when trading a CFD.
CFDs are often traded on what is called leverage to give traders more trading power and flexibility. Leverage refers to the use of borrowed capital to increase the size of one’s position in order to potentially amplify gains.
Here’s an example of CFD trading:
Therefore the two clients enter an agreement to settle the difference from $1,175.00.
After 3 days, Gold is trading at $1,180.00. Thus, Person A has made a profit of $5 and person B has made a loss of $5.
In fact, trading CFDs isn’t all that different from trading traditional shares.