With Contracts for Difference or CFDs, traders (and maybe even longer-term investors) can trade on the changing value of an asset, rather than buying or selling the actual asst outright. The difference between the open and closing trade prices are settled in cash. The physical asset is not actually owned if bought or delivered if sold.
There are several benefits to this.
ONE OF THE MOST POPULAR TRADING TYPES
It is worth starting out by discussing just how popular CFD trading has become, or Contracts for Difference, to give it its full title. When online trading began to gain popularity, traders wanted new ways to invest in stocks and other assets without having to play the long only game. CFDs allow you to trade based on whether you think stocks or indices (or a variety of other asset classes) are going to go up or down.
CFDs permit traders to trade in the price changes of numerous financial market assets and CFDs are investments that are derived from these underlying assets. Fundamentally, CFDs are used by traders to speculate if the price of the underlying asset will go up or down. If the CFD buyer predicts correctly and the underlying asset price rises, the CFD also rises and they could then sell the CFD. The difference between the buy price and the sell price of the CFD would be the profit (or loss) from the trade. This is then settled in the trader’s account at the broker in cash. Conversely, if the trader thinks the underlying asset will fall, a sell position can be entered and then a purchase is made to offset trade. Once more, the difference between the prices is the gain (or loss), which is cash settled via their broker account.