Contract For Difference (CFD)
What is a contract for difference (CFD)?
A CFD is an agreement, typically between a broker and an investor, that one party will pay the other the difference between the value of a security at the start of the contract, and its value at the end of the contract. If the market moves in the direction you predicted then you profit the price difference. If the market goes against you, the difference is deducted from your trading account balance.
Where have you heard about contracts for differences?
CFDs were originally traded among financial institutions, such as banks. In recent years, they've become more popular with retail investors because they allow you to trade without having to own any securities yourself.
What you need to know about contracts for differences...
CFD brokers operate in a market that is, in general, less regulated than those where actual securities are traded. This means that you don't need to put so much money down to begin with. Instead, you have to put down a margin of the contract value, which can be as low as 2%. This means you are using leverage to potentially generate greater returns. But, leverage can expose you to greater potential risk, as well as rewards, if you get it wrong.