A contract for difference (CFD) is an agreement for exchange of the difference in the value of a currency, equity stock, or a commodity product between the times in which the contract is valid. CFD trading is the new, easier, flexible, and far more sophisticated way to invest your capital.
CFD trading is a geared product and provides investors with unprecedented trading leverage opportunities. Designed as a financial derivative, a CFD gives the investor the potential to invest in a wide array of investment tools in a variety of markets. With CFDs, the trader can discover profits by trading on the price movements of securities and indices. It also enables the trader to invest in different market conditions and makes it easier to hedge positions.
CFDs provide a flexible platform for trading in various commodities including foreign exchange. A trader can make profits in two ways - buying a currency when it is expected to appreciate or selling when its value depreciation is anticipated. Forex trading with CFDs allows the trader to consider the buying price as the base price. The trader need not worry about the least or the maximum value of the currency pair. As CFDs are highly leveraged products, the trader can open positions that are almost 20 times the margin money deposited. Sometimes the leverage options can go as high as 500 to 1. One should be wary of opening up highly leveraged positions which may be difficult to cover. It may result in diminishing the initial capital.
CFDs are subjected to an alternative tax treatment as it does not result in actual acquisition of the underlying instrument being traded. The trader receives only a contract, similar to the futures.
CFD trading is gaining popularity with investors across the world. This is because of the ease and flexibility of operations and the variety of instruments on which a trader can trade with a contract for difference.