Understanding CFD: What is Contract For Difference?

Being interested in leverage trading keeps you surrounded by numerous questions that might hinder you from giving off appropriate trading decisions. Then, you start asking, ‘What is a CFD?’ Instead of going to other places and rampaging all the other related websites, you are lucky enough to stumble upon ours that will provide you a comprehensive outlook of what CFD trading really means.

Contract For Difference

CFD is short for Contract For Difference. It is a type of derivative that’s quite popular nowadays especially because leverage is being used here, more people get drawn to it. Because of margin, you can open a larger position just by paying a small amount as an initial deposit. As a derivative, the trader will not be able to own the underlying. Rather, it gives the trader the power to buy or sell the financial instrument, and its value can rise or fall. No matter the movement of its value, the trader can still benefit from it as long as he predicts correctly its movement in the market.

More importantly, in CFD trading, there is a broker that provides a contract stating that the difference of the opening and closing of positions will be shouldered by the ones who will have a losing trade. Therefore, it is important to have several tools to accurately predict the movement of the market.

Leveraged Trading in CFD

When you trade CFD, you are also holding a leveraged position. When you hold a leveraged position, you are paying a small percentage and you gain more exposure to the market. This is like putting in a small deposit so you can borrow a larger amount. Also known as trading on margin, leverage trading allows you to open a trading position and maintain it, also called margin, and this is only a fraction of the entire amount of the trade size.

When trading CFD, you will have to deal with these two types of margin – the deposit margin and the maintenance margin. Deposit margin is the amount that the trader needs to deposit to be able to open a trading position. Maintenance margin, on the other hand, is the amount that needs to cover losses on trades if the deposit cannot do so.

Long Position and Short Positions in CFD Trading

What is a CFD? Aside from the fact that it is a derivative and works with leverage, it also deals with long positions and short positions.

In CFD, you are allowed to profit, either in a rising market and a falling market too. No matter if the asset is appreciating or depreciating, you can still make money since the contract offers the buy and sell options.

You can mimic investing of an asset when you open a long position or also known as buying (going long). On the other hand, you can also open a short position (sell) if you predict that the price will decrease. This is called ‘betting’ against the movement of the market. When you take a short position, you are selling or you are ‘going short’.