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Using contracts for difference (CFDs) to speculate on the price direction of different asset classes has become hugely popular in recent years. Instead of the traditional method of just buying shares in a publicly-traded company, CFDs allow users to buy and sell shares, or equity CFDs, to potentially profit from both rising and falling markets. Read on to learn more about it and how to get started. What are Contracts for Difference (CFDs)?
When answering the question 'What does CFD mean?' the simplest definition is that a CFD is simply a contract between two different parties (the buyer and the seller) to exchange the difference in the value of a given asset or financial instrument, from the time the contract is opened to the time the contract is closed.
When trading with an equity CFD broker, the buyer is the client or trader and the seller is typically the broker. There are some distinct features that are unique to CFD trading, such as:
Ownership - When trading CFDs, the trader does not own the underlying asset, they are merely speculating on the future price direction of the asset. Leverage - With CFDs, traders can utilise leverage and trade on margin. This means that traders can control a large position with smaller capital. For example, a retail trader may be able to access 10:1 leverage for share CFDs. This means a trader could potentially control a position with a value of $5,000 with just $1,000 in their account. But, while it could amplify gains, it can also amplify losses.
Trade long and short - CFD traders can actually trade both long and short and potentially profit from both rising and falling markets if there trade direction is correct. This is perhaps one of the biggest differences between CFD vs equity trading. In the latter, the trader can only buy equities (shares).
Flexible holding times - CFDs allow traders to hold trades for seconds, hours, days, weeks, months and longer providing useful flexibility in managing trading positions. The different types of tradable CFDs
Contracts for Difference (CFDs) are merely derivatives of other asset classes. They simply track the performance of that asset class. Because of this, CFDs can be traded on a wide variety of different asset classes and financial instruments. Users can trade:
Equity CFDs on the price direction of Apple, Tesla, Facebook and others.
Equity Futures CFDs.
Commodity CFDs (gold, silver, oil, etc).
Forex CFDs (EURUSD, GBPUSD, etc)
Exchange-Traded Fund CFDs