Contracts for Difference

CFDs are advantageous because traders are not required to actually take possession of the underlying assets being traded. This makes trading more affordable and accessible to the everyday trader. The CFD tracks the price fluctuations of the market for the underlying asset, which means you are simply looking to make predictions on future price movements on the asset you are trading, either up or down.

For instance, if you purchase a stock CFD of Microsoft, the value of your market position will increase alongside the rate of appreciation of Microsoft stock shares. On the other hand, if the stock’s value depreciates, your investment will as well.

Buying a CFD is referred to as opening a “long position” or “going long” in the specific market. Basically, you are predicting an upward movement in the market. Alternatively, predicting a downward moving market is known as opening a “short position” or “going short” for the specific market. When you go short, your broker is actually loaning you the shares that you had not previously purchased in order for you to sell at the current price. Then, upon closing the short position, you will be buying back the shares at the closing price.

CFDs are basically a contract between you and your broker to pay or receive the difference between the opening and closing prices of the selected asset.