What is a CFD (Contract for Difference)?

The Contract for Difference is an instrument of trading form between a “seller” and a “buyer”.   The content of the contract is based on the difference between the value of an asset at the opening and at the end of the day. The profit or the loss is realized when the price of the asset moves up (long position) or down (short position). In this case, the contract is base just for the movements of the principal instrument, so you don’t have to own a financial instrument to make this contract.

The contract for difference acts like a financial derivative and the principal instrument can be any from the following categories: equity, stocks, global indices, currencies and commodities. When you enter this contract you don’t buy the asset, but you make a guess about the movement of the price. Because it doesn’t have an expiration date like other instruments, this contract closes each trading day, but if the next day you want to keep the same position open you can do it if your account can support it. At the end of each day your account will be debited or credited.

The contract of difference is very flexible because it has no restrictions on the entry or exit price. You can buy or sell first and this is not going to affect you in any way. Also you can retreat any time even if the market is open. There is only one condition to close a contract for difference by making a reverse trade on your original position (long/short).

This kind of contract is available in many countries like Australia, Austria, Canada, Cyprus, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, The Netherlands, Luxembourg, Norway, Poland, Portugal, Romania, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom and New Zealand.

Like any contract, it has some disadvantages. This market is not regulated and the brokers can’t be always trusted. The best way to choose a broker is by their reputation and financial position. Also the profit from this kind of contract isn’t so much because you have to pay for every entry and exit. The spread will change by deceasing winning trades by small amounts and increasing losses by small amount.

Regardless of these disadvantages, the contract for difference is good if you want to make profit in a short time. Contract for difference include easy access to market and no trading rules when the market is open. So you don’t have to be a professional trader to buy a contract like this.

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