CFD – Contract for Difference

CFD or Contract for Difference is an agreement or contract between a seller and a buyer. CFDs allow traders to buy or sell units of an underlying asset without actually owning them. Within this contract, the buyer would be paid by the seller if the difference of the asset’s current value and the value from when it was bought is positive. If the difference is negative, the buyer would be the one to pay the seller.

CFDs started in Europe, where it was just initially stocks that were traded on the London Stock Exchange during early 1990. This sort of trading was only accessible to institutional traders for them to hedge their exposure on an underlying share. As the 90s inched toward the millennium, CFDs became more accessible to retail traders and gained its popularity with the rapid rise of computer technology.

Today, with advancements in the modern days of finance, the CFD market has developed in leaps and bounds along with it, with a wide range of underlying financial instruments from stocks, indices, commodities, derivatives, and of course, bonds.

CFDs are mostly traded in developed countries, and with the ability that one can trade CFDs on margin, financial institutions often trade these instruments to hedge against ownership of the asset itself as well as private individuals and retail traders who speculate the direction in which its price would take.

Today, with modern brokerage firms offering more diverse CFDs, investors are given them many opportunities to profit off of it. Along with the benefits of low pricing, advantageous positions, and time-saving executions, CFDs have gained massive popularity over the past decade.

Types of CFDs:

• Indices

The Stock Market Index or just Index (or Indices for plural) is a numerical data that measures a specific sector of the stock market. An example of indices includes the S&P 500, DAX 30, FTSE 100, and Nikkei 225. 

• Stocks

Also known as an equity or share, a stock is a type of security that represents the proportional ownership of a corporation. Almost all leading companies in the world offer shares to investors such as Apple Inc, Coca Cola, and Facebook.

• Commodities

Commodities are commercially available goods. It is one of the oldest forms of trading, and because of this, many trading platforms, apart from commodity markets, offer opportunities for traders to trade the value of essential goods globally.