What is Contract For Difference?
CFD trading is different from traditional trading. With CFD trading, the profit potential is much higher. Here’s why.
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A CFD is a contract for difference and when you trade CFDs online, you are basically forming a contract between you and your broker to pay the difference in the value of a CFD market position. This difference is between the opening and closing prices of the position. In the online trading world, most investors enjoy trading CFDs. The reason for this is that in CFD trading, you are not buying and selling the actual asset. Instead, you are simply making a prediction of the direction the price of an asset will move. This means that you can profit even when the market price is falling.
Let us look at an example. If you purchase a Facebook stock CFD, you are essentially predicting that the price of the stock will rise. This is referred to as taking a “long” market position. On the other hand, if you believe that the price of the Facebook stock will fall, you would be selling or taking a “short” market position.
One of the main attractions of CFD trading is the use of leverage. In traditional trading, you would need a large amount of trading capital to open certain market positions. For example, if Facebook’s share price was $1,000 each, you would need $10,000 to purchase 10 shares. With CFD trading and using leverage, you would only need to put up a small portion of the required capital to open the trade position on Facebook shares. As such, you would be able to control a larger market position with a small amount of trading capital. You also have the opportunity to earn bigger profits if the trade moved in your favor. Always remember that leverage trading can also cause a greater risk of loss so trade with care.