CFDs (Contracts For Difference) are financial derivatives that replicate an underlying asset such as futures and financial options (gold, shares, bitcoin, indices, currencies, etc.) in which the investor and the broker agree to exchange the difference between the bid and ask prices of an underlying asset.

What is a Contract For Difference

They are contracts that work like futures, but do not have an expiry date. They are also more flexible than futures as futures are traded in batches and Cfds are traded one at a time, like stocks.

As a financial derivative, it is an instrument with which it is possible to speculate that the underlying asset it replicates will go up or down.

Main characteristics of CFDs:

  • They are contracts without an expiry date that are signed between the trader and the broker.
  • They are traded over-the-counter, so there is no authority directly controlling the trades.
  • High leverage if you wish. You can also trade CFDs without leverage.
  • CFD prices are derived from their underlying assets, with no other variables influencing them. However, they do not fully reflect the movement of the underlying.
  • They allow trading both upwards and downwards.
  • A wide variety of underlyings are available
  • High trading costs, either in terms of commission, spread (difference between the bid and ask price) or swap (fee for keeping the position open overnight).
  • Every day there is a daily liquidation of positions and recalculation of collateral, and the broker may require you to increase your initial collateral. To open a position, the broker will only require collateral.
  • Requires experience, not recommended if you are a beginner as they are high risk. You must practice on demo.
  • They are useful for small accounts because they do not require a lot of money to invest in them.

Regarding the charts, you should be aware that CFD prices do not match the real chart; especially with low time frames (daily or below daily charts). If you trade weekly charts, you will have no problem. This is why it is recommended that you go by your CFD broker’s chart rather than the price chart of the relevant stock or underlying.

How to make money trading CFDs?

The counterparty to your trade is the broker, so they have a vested interest in you losing, because when you lose, the broker keeps the money. And when you win, they lose.

Brokers inform about the dangers of CFD trading and the average results of people who use them. If you want to trade this type of instrument, read what your broker says, as there are many, but not all of them are reliable. And of course, try demo trading first.