What is CFD

CFD trading overview

CFD trading

CFD trading is a type of derivative trading, based on an agreement between two parties, typically between a broker and an investor. In particular, one party agrees to 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.

CFD is an acronym for ‘contract for difference’, which denotes the agreement between a broker and an investor to trade on the difference. CFD trading enables traders to speculate on the price movements of a variety of financial instruments such as shares, indices, commodities, or currencies without owning the underlying asset.

Why trade CFDs with Capital.com?

 
Withdrawals within 24h
 
Client’s money segregation
 
Personal data protection
 
Up to 1:200 leverage
 
No commission on trades
 
Licensed by CySEC

What are CFDs?

The term CFD stands for ‘contract for difference’. According to the CFD definition, a contract for difference allows investors to trade on the rising or falling prices of an asset without having to own the underlying asset. Since the value of a contract for difference is determined, or derived, from the value of the underlying asset, a CFD can be referred to as a derivative instrument.

The mechanism behind CFD trading is quite straightforward. If you believe the price of a chosen financial instrument will go up, you open a CFD position and buy the amount of CFDs you see fit. In other words, you ‘go long’. If the market moves in your favour, you reap the profit. Similarly, if you expect the price of a chosen financial instrument to drop, you take a position of a market going down, or simply ‘go short’. Yet, if you miscalculate the direction of the market movement and the price changes contrary to your expectations, you may suffer losses.

A contract for difference is a leveraged product. That is, CFD trading enables investors to use leverage and magnify a modest initial investment into a much larger market position. Instead of putting upfront a large sum of funds, CFD traders may compete the buy transaction by setting a margin account and borrowing financial funds from their broker. Bear in mind, that this investment model comes with its benefits and risks. Once you magnify your investment position, you significantly increase both your potential profits and your potential losses.

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What can you trade with a CFD?

CFD trading enables investors to gain access to multiple financial markets from one account on a single platform. In particular, investors can enter the share, index, commodity, or forex markets and trade a contract for difference (CFD) on any of the assets.

 
CFD trading on shares allows investors to enter the global capital market, without having to deal in shares directly. Instead, an investor holds an individual contract for difference, which corresponds to a single share and mirrors its price swings. In this way, investors can take advantage of both rising and falling stock prices, because going long or short is equally seamless. In contrast with traditional share trading, CFD trading offers leverage and does not require investors to pay the full market value of the purchase. Presently, CFDs are exempt from stamp duty – a clear advantage of CFD trading in the UK.
 
CFD trading on indices is one of the very few ways an investor can access the index market. Just like CFDs, indices claim no ownership rights to the underlying asset. Indices simply mirror the overall change in the values of the securities listed on a particular market. When dealing in CFDs on indices, a contract for difference corresponds to a certain sum of money per unit in the local currency of the underlying index per index point.
 
CFD trading on commodities is most suited to investors, willing to get more futures market exposure but unable or unwilling to buy a costly commodities futures contract. Instead, an individual commodity contract for difference corresponds to a certain sum of money per point of movement in the commodity, priced in its base currency.
 
CFD trading on currency pairs, or forex, provides an opportunity to participate in the world’s most traded financial market. Because forex usually involves relatively small price movements, the forex market is most fit for leverage. That is why, a forex contract for difference is a great compromise for investors seeking to magnify their market position.

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FAQ

Why trade CFDs with Capital.com?

Capital.com brings an AI-powered mobile platform that enables you to receive hands-on financial experience and trade the world’s top companies, popular indices, commodities and forex via CFDs. The company is based in Cyprus and licensed by CySEC.

How does CFD trading work?

Trading a CFD means entering into a contract between a broker and an investor, who agree to exchange the difference in value of the underlying asset at the beginning of the contract and its value at the end of the contract.

How to trade CFDs?

Start with choosing the market of interest, be it shares, indices, commodities, or forex. Then, decide on the value prospects of the chosen financial instrument. That is, if you believe that the price of the asset is going to rise, you naturally go with buying, or going long. If the opposite is true, you prefer selling, or going short. With CFD trading, you are free to determine the size of your trade, however small or large. Note the stop loss function, which automatically closes your position if the market moves too far against you. Once you have placed your trade, you can monitor the asset quotes in real time and see if your price forecast has been correct. If so, you generate profits; if the opposite is true, you suffer losses.

What are the advantages of CFD trading?

CFD trading is flexible and accessible. Because a contract for difference can be written on practically any asset, a CFD trader can access multiple markets without involving numerous brokers, forex providers, and futures exchanges. In fact, an investor can speculate on numerous financial markets all from one account via a single platform. In addition, there is no stamp duty to pay on CFDs which makes CFD trading in the UK a tax-efficient investment strategy. Finally, CFD trading implies efficient use of investor’s capital. Trading on margin means you can diversify your investments because you don’t tie up all of your capital into a single transaction. Remember that magnifying your returns comes with running greater risks.

What can I trade with CFDs?

A contract for difference (CFD) can be written on a variety of assets from different financial markets such as indices, shares, forex, commodities and more. In fact, CFD trading enables you to take advantage of price swings on multiple financial markets all from one account on a single platform.

CFD trading vs share dealing

CFD trading presents a more flexible alternative to traditional share dealing. The former suggests that an investor speculate on the price swings of the underlying asset but claims no ownership right to such asset. The latter implies taking an ownership stake of the underlying asset in pursue of dividends. CFD trading in the UK offers a clear tax advantage, since investors are exempt from paying stamp duty. Unlike traditional share dealing, CFD trading is leveraged, meaning investors can significantly magnify their market position and trade on margin. Although both CFD and share trading provide an access to global markets, only with CFDs may investors trade even in volatile markets and take advantage of both rising and falling asset prices.

What is leveraged trading?

CFD trading is highly leveraged, which means that investors are able to magnify their market position despite a relatively small initial investment. At Capital.com, we offer up to 1:200 leverage. That is, for each deposited currency unit, you may borrow up to 200 currency units, depending on your trading experience and background. In other words, you may enlarge your market position up to 200 times and so increase your potential returns. Bear in mind that leverage influences your potential risks, too.

Who can trade CFDs?

CFD trading is a popular choice both among trading novices and experts. CFDs attract trade newbies, as it allows to access various financial markets without risking a large starting capital. Share traders turn to CFD trading as an efficient portfolio diversification and risk hedging tool. Forex traders benefit from leverage and margin. Commodities market affiliates enjoy the possibility of speculating both on the rising and falling prices, or going long and short.

What are the risks of CFD trading?

CFD trading entails a high degree of risk. Because the value of investments can both rise and fall, you may suffer losses if the market moves against your expectations. In addition, leveraged trading implies not only higher potential returns, but also greater risks.

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