A Contract for Difference (CFD) is a financial derivative that allows traders to speculate on the price movement of assets without owning the underlying instrument. When you enter a CFD trade, you agree to exchange the difference in the price of an asset from the time the position is opened to the time it is closed. If the price moves in your favor, you profit. If the price moves against you, you incur a loss.
CFDs use leverage, which allows traders to control a large position with a smaller amount of capital. For example, a 5% margin requirement means you only need $500 to open a position worth $10,000. While leverage can amplify potential gains, it also significantly increases the risk of losses exceeding your initial deposit. Traders can go long if they expect prices to rise or short if they expect prices to fall.
Costs associated with CFDs include the spread, which is the difference between the buy and sell price, and overnight financing fees for positions held past market close. Trading CFDs involves a high level of risk to your capital and is not suitable for all investors. Always ensure you understand the mechanics of leverage before executing trades.
How this answer was produced
AI-assisted draft, human-reviewed by AlphaScala editorial against our standards before publication. General education, not advice for your specific situation.