CFD Trading | Contracts for Difference | CFDs (2024)

FAQs

CFD Trading | Contracts for Difference | CFDs? ›

A contract for difference (CFD) allows traders to speculate on the future market movements of an underlying asset, without actually owning or taking physical delivery of the underlying asset. CFDs are available for a range of underlying assets, such as shares, commodities, and foreign exchange.

Similar to a forward or futures contract that is cash settled. The amount of the cash settlement will represent the difference between the underlying asset's price agreed at the outset of the contract and its market price at the date of the settlement of the contract.

Additionally, most CFD brokers don't accept US citizens or US residents as clients. CFDs are illegal in the US because they are an over-the-counter (OTC) trading product. OTC trading products aren't listed on regulated exchanges like the New York Stock Exchange (NYSE), bypassing US regulatory bodies.

Key Takeaways. A contract for differences (CFD) is a financial contract that pays the differences in the settlement price between the open and closing trades. CFDs essentially allow investors to trade the direction of securities over the very short-term and are especially popular in FX and commodities products.

But, unlike shares, when you trade a CFD you don't own the underlying asset. Instead, you speculate on its price movement. You agree to pay the difference in price of the underlying asset between when the contract opens and closes: if you 'buy' a CFD (a 'long trade'), you expect the value of the asset to increase.

Part of the reason why a CFD is illegal in the U.S. is that it is an over-the-counter (OTC) product, which means that it doesn't pass through regulated exchanges. Using leverage also allows for the possibility of larger losses and is a concern for regulators.

CFD Traders Reducing risk exposure

One of the main reasons many traders fail is the lack of risk management strategies. By failing to adopt certain risk management techniques and simply opening trades without protecting their trades with take-profit and stop-loss orders, they risk losing all their trading funds.

This requires constant vigilance of the market and price movements. As well as the use of effective risk management to safeguard funds. Some of the most popular risk management tools used in CFD trading are stop-loss and take-profit orders.

It's possible to make money trading CFDs with experience and a thorough understanding of how the financial markets work. But, it's well known that around 75% of retail traders (private investors) lose money when trading CFDs.

As previously mentioned, US citizens are unable to trade in CFDs because it is against US securities law. The Commodity Futures Trading Commission (CFTC) and its overseeing institution, the Securities and Exchange Commission (SEC) both prohibit the opening of CFD accounts through domestic or foreign brokerages.

Can you lose money on CFD trading? ›

A guaranteed stop loss order, offered by some CFD providers, is a pre-determined price that, when met, automatically closes the contract. Even so, even with a small initial fee and potential for large returns, CFD trading can result in illiquid assets and severe losses.

Key Takeaways. Contracts for difference, or CFDs, are short-term leveraged derivative contracts that track the value of some underlying instrument and pay off accordingly. Spread betting involves placing a speculative bet on the price movements of an underlying instrument without actually owning it.

Is CFD trading legal? CFD trading is legal in many countries, including Australia, France, Germany, Italy, Spain and the UK. However, CFD trading is banned in some countries, including Belgium, Hong Kong and the US.

CFD margin requirements can vary depending on the market that you're looking to take a position on – and not all of our markets will have the same margin rate. For example, we require a deposit equal to 5% of the total position size on popular indices like the FTSE 100, or 20% on shares such as Tesla.

A CFD has no expiry date meaning an investor can hold an open CFD position indefinitely and will pay or receive an overnight financing rate linked to the London Inter Bank Offered Rate (LIBOR). Financing charges apply to open overnight CFD positions.

A CFD – short for 'contract for difference' – is the type of derivative that enables you to trade the price movements of these financial markets with us. With this form of trading, you don't own the underlying asset – you're only getting exposure to its price movements.

When trading CFDs, the main difference is the cost of holding the position overnight. Futures CFDs do not have any overnight swap charges but are subject to rollover charges when the underlying asset is due for expiry. With cash CFDs, there are no contract rollovers, but an overnight swap fee will be charged.

Cash adjustments on CFDs are booked on Ex-date based on the eligible holding on ex-date-1 reflecting the market price movement on the Ex-date, but the actual value of the payment will be settled on Pay Date. For long CFD positions, a Return Adjustment is subtracted from the Cash Adjustment.