Understanding Contracts for Difference

A CFD, otherwise known as Contract for Difference, allows you to trade the markets without actually having to take possession of the underlying asset. Learn more now.

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With trading CFDs, you are essentially speculating on the future market movements without actually taking possession of the asset being traded. For example, when a stock CFD on Microsoft appreciates, the value of the CFD position will also appreciate alongside the market movements.

When you buy a CFD, it is known as “going long” on a market. Alternatively, when you sell or speculate on a downward moving market, it is referred to as “going short” on the market you are trading. When going short, you will profit from the market depreciating.

Basically, a CFD can be understood as an agreement between two parties, the trader and the broker. The terms of the agreement are for the difference in the value of the CFD position from the time of opening of the position to the closing of a position to be paid. Therefore, if the value of the CFD position has increased by the time you close the position, the broker will essentially be paying you, the trader, the difference in value. On the other hand, if the CFD position’s value has decreased, you will be paying the broker the difference.