Contract for Differences (CFDs) occur for financial derivatives transactions, where the difference between the settlement price of opening and closing transactions is settled in cash and there is no physical delivery of goods between the buyer and seller. The underlying value of the asset is not considered in the transaction. Unlike options and futures contracts, CFDs have no expiration date.
Traders are encouraged to use CFDs because of its higher leverage, lower cost than buying the underlying asset, and increased ease of trading long and short. CFD traders bet on whether the price of a financial instrument will increase or decrease. Traders expecting a price increase will buy a CFD, while traders who expect to see a price drop in the future market will sell.
CFDS are available to experienced European traders, and are not eligible for citizens of the United States and Hong Kong. This is due to the fact that it does not have strict rules, oversight, and legislation unlike traditional markets, so the credibility of the broker and contract depends on other factors, such as market reputation. CFDs are offered in a forex market. Given the nature of the contract, CFDs are subject to market, counterparty, and liquidity risk.
The money that you invest in a CFD is a fraction of the market value, which means traders have to invest less money to participate in the contract and there is a greater potential for returns and losses. For example, you may only need to spend $ 5,000 for a $ 100,000 contract. In fact, you are borrowing 95% of the rest of this value. In this example, only a 1% change in share price could result in a $ 1,000 loss (equivalent to 20% of your initial capital).