Contract for difference (CFD)

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    A contract for difference (CFD) is a financial instrument that allows traders to invest into an asset class without actually owning the asset.

    The CFD is a contract between two parties (the buyer and the seller). It states that the seller will pay the buyer the difference between the current value of an asset and its value at “contract time”. If the difference is negative, the buyer pays the seller instead.

    In effect, CFDs are derivatives that allow traders to take advantage of both prices moving up (going long) or prices moving down (going short).

    Visit our stocks school to learn more about CFD trading:

    Cost of trading with CFDs

    The principal advantage of CFD trading is cost. Because there are typically lower margin requirements and markets are less regulated, a person can trade with a much smaller account compared to trading the actual asset.

    Standard leverage in the CFD market begins with as little as a 2% margin requirement, meaning a trader can trade larger position sizes. Lower margin requirements mean less capital outlay for the trader and greater potential returns.

    However, increased leverage can also magnify any losses the trader may make. Please read the following lesson on this topic: