Contract for difference (CFD) trading is when a contract is made between an investor and an investment bank. When this contract comes to an end, the parties involved will exchange the difference between the opening and closing prices of the chosen financial market. CFDs tend to be the most attractive to day traders, as they already use leverage to trade assets, particularly those that are more expensive to buy and sell. CFDs are an advanced trading strategy that is best suited to more experienced traders, who prefer to trade in short-term stock movements. Another reason that trading in this way can be so attractive, is that you have the opportunity to benefit not only from rising prices but also from trading losses.
CFDs allow investors to trade in the form of the price movements of securities and derivatives – whether the stock’s worth will rise or fall over time. If a trader expects that a stock will move upwards in price, then they will opt to buy, whilst if they predict a decline, they will most likely sell. If sold, the net difference between the purchase price and sale price will be brought together, before being settled through the investor brokerage account, therefore identifying the profit. Similarly, if you believe that a stock’s price is set to decline shortly, you can go on to place an opening sell position, closed when you also purchase an offsetting trade. The net difference is then settled through that same brokerage account.
Unlike physical shares or currency pairs, you aren’t buying or selling an underlying asset with
CFD stocks trading. Instead, you’re buying and selling several units for a financial instrument. In a nutshell: for every stock that moves in your favour, you’ll gain multiples of the original CFD units that you’ve bought or sold, whereas, you’ll make a loss if the price moves against you.
