Contract For Difference

Trading CFDs allows investors to trade a market without having to own the underlying asset. Instead, you are attempting to predict future movements in the asset’s price. The value of a CFD will mirror the pricing of the underlying asset and when you close a CFD position, the difference between the closing price and the opening price will be your profit or loss on the particular trade.

For example, if you buy a stock CFD of Apple, the value of your investment will appreciate at the same rate the value of Apple stock shares increase. Inversely, if the value of Apple stock goes down, your investment will lose value, mirroring the movement of the market for Apple stock.

When you buy a CFD, this is known as “going long” or taking a “long position” in the market. You will essentially be predicting that the market will move up. However, when you are predicting the market will go down, this is referred to as “going short” or taking a “short position” in the market.

Essentially, CFDs are agreements between a trader and the broker. The terms of the contract between the two parties are for an exchange of the difference of an asset’s value between the time a contract is opened and closed.