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What are CFDs?

CFD is a universal trading instrument that provides an opportunity to earn from the price movements of various assets: indices, stocks, futures without the need to actually buy and physically hold them.

Let’s take an example: you purchased a CFD on Brent crude oil, and the asset’s price went up. In this case, the brokerage company that sold it to you will pay the corresponding difference to you. If the price falls, the broker will deduct this difference from your trading account.

Where to trade CFDs?

CFDs were initially used by hedge funds and institutional traders to secure their positions on stocks on the London Stock Exchange. Later, brokerage companies began to expand their CFD offerings. CFDs were introduced for a range of other underlying assets, such as commodities, bonds and foreign exchange (currencies).

Contracts that are based on key indices such as the S&P 500, Dow Jones and DAX quickly gained popularity. Stock CFDs are especially in demand.

Now, CFDs are available on almost all existing financial assets. But there’s no separate marketplace, say, an exchange, to trade CFDs. Many brokers offer CFDs in all the world’s major markets. For example, you can trade CFD with a global online broker AMarkets, which allows around-the-clock access.

What types of CFDs are there and how to trade them?

There are several underlying assets you can trade with CFDs:

  • Foreign exchange market assets, including currency pairs.
  • The bond owner can receive (at the indicated time) the par value of the asset from an entity that issued these securities.
  • Oil, gold, silver, etc.
  • Allows you to receive income from dividends or price difference.
  • A financial instrument that measures the performance of a basket of securities intended to replicate a certain area of the market.

When placing a CFD order, a trader specifies the amount and rate, projecting whether the asset will rise or fall. So, if a trader thinks that the asset’s price will rise, he buys it, and if he believes that the price will go down, he sells.

If the projection is correct, the trader’s profit will increase as the price moves in the specified direction.

Example of a contract

For example, Coca-Cola stocks are trading at $100 per share. An investor buys CFDs on 1000 shares. If the price rises to $105, the broker will pay the investor $5,000. If the price dips to $95, the broker will charge the investor this amount.

The contract doesn’t imply that the investor must physically own the shares, which allows him to avoid registering ownership of assets and the associated costs.