What is a Contract for Difference (CFD)?
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What is a Contract for Difference?
Contracts for Difference (CFDs) are financial derivatives that allow you to speculate on price movements without owning the underlying asset. Think of them as a way to speculate on whether a market will go up or down. With CFDs, you can trade a wide range of assets, from shares and indices to currencies and commodities.
How do CFDs work?
For a CFD trade, a broker will quote a price that consists of a bid (sell price) and an offer/ask (buy price).
The difference between these two prices is known as "the spread". Traders speculate whether the price of an asset will move up or down.
Going long (buying): If a trader believes the price of an asset will rise, they will "buy" or go long.
Going short (selling): If a trader believes the price of an asset will fall, they will "sell" or go short.
A trader makes either a profit or a loss based on whether the market moves in their favour or against them.
Example of a CFD trade:
A standard UK 100 CFD contract has a contract size of £10.
You buy 5 contracts of the UK 100 index at a price of 8,000.
If the index rises by 15 points to 8,015, and you close the position, you make a profit of £750 (15 points x 5 contracts x £10).
If the index falls by 15 points to 7,985, and you close the position, you incur a loss of £750 (15 points x 5 contracts x £10 per point).
Features
Leverage to amplify potential: Trade larger positions with a small initial deposit, giving you the ability to maximise returns if the market moves in your favour. Please note that this also amplifies your losses if the markets moves against you.
Reflect the underlying market: When trading CFDs you never own the underlying asset. CFDs are designed to imitate their underlying equivalent. So for example, if you buy 100 Tesla CFDs, it is equivalent to buying 100 Tesla shares in the underlying market.
No stamp duty: While your profits may be subject to capital gains tax, CFDs are free from stamp duty. This is because you don’t actually own the shares.
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It's important to note that trading CFDs involves risks, and individuals should carefully consider their objectives and risk tolerance before engaging in CFD trading. It is always recommended to seek professional advice and conduct thorough research before making any trading decisions. Please note that this information is not intended as an endorsement to buy, hold, or sell any investment or financial product, nor should it influence any investment decisions.