Contracts For Difference, or CFDs, refer to an arrangement between two parties that sees a buyer and seller trading on the value of an asset before and after price fluctuation, resulting in either a negative or positive difference. Online forex trading through CFDs provide traders with the opportunity to benefit from both an increase and decrease in prices of the underlying instruments without actually needing to own these financial instruments.
CFDs are essentially financial derivatives that enable traders to take a long position (when asset prices are expected to increase) or a short position (when prices are expected to drop). It’s best to consider a couple of basic contract for difference examples before planning any CFD trading strategies.
- When a CFD trader believes a share price will drop he will sell the shares to a broker at an opening price.
- If the share price has indeed dropped at the contract time (closing price) then the trader will buy back the underlying financial instrument at the lower price.
- After internal CFD adjustments (commission and interest) are taken into account, the trader will be left with a net profit or loss depending on whether the difference is positive or negative respectively.
- Holding long position CFD in the trading accounts allows the trader to profit from an increase in the priceof the underlying instrument.
- As the more traditional approach, going long sees the trader purchasing the instrument at a certain price. Following a price increase the trader will then sell that instrument at the higher price, thereby making a profit.
Hantec Markets are UK-based FX and CFD brokers offering top fx trading platforms and CFD trading platforms by only working with the latest software. Our list of best in class forex and CFD trading systems support online FX and CFDs trading which makes us the traders’ first choice UK based FX and CFD brokers. Feel free to Contact Us should you have any queries relating to Contracts for Difference or any of our other service offerings.