Understanding CFD Trading

Understanding CFD Trading

Understanding CFD Trading

Contracts for difference or CFD trading are a type of trade on the stock market. It works as an agreement where a seller of a financial instrument promises to exchange with the buyer the difference in the value of the instrument. This is calculated as the difference in the value of the instrument between the opening of the trade and close of the sessions. If there is an increase in the value, the buyer receives a payout, and the opposite happens if the value is lowered in the trading. The payout being the difference in value, therefore it is contracts for difference or CFD!

An example would probably help understand better. Let's say a thousand shares of company have been bought in a CFD trading session. During the course of the session, the price rises from $10.00 to $10.50. Therefore, the total profit registered is $500.00. The benefit in this practice is that under this scheme one can make a profit even in a falling market, without transfer of ownership.

How Does it Work?

The concept of the trade is quite simple. If you think the market may rise, an offer price is fixed and a buy is made or vice versa. That is, buy at a bid price if the market is perceived to fall.

CFD trading happens between a service provider and individuals, each provider having their own contract conditions.

When the trade opens on an instrument, a "position" is formed which does not have expiry dates. The position closes as a reverse trade is completed. This is when the difference between the opening and closing values of the trade has to be measured. The payout could either be a profit or even a loss.

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