What are Contracts for Difference?
First things first – what's a CFD?
Contracts for Differences (CFDs) are a way to take a view on the movement of a financial instrument, without having to physically buy the assets. CFDs are basically agreements between two parties, to pay the difference between the opening and closing price of the specified assets - mimicking what the underlying stock or market is doing. However, the actual stock or market you are trading doesn’t change hands, it is simply an easier way to trade the market without having to go through all the hassle of calling an old-fashioned broker or your bank!
So how does CFD trading work?
CFDs are financial derivatives that allow traders to take advantage of prices moving up (long positions) or down (short positions) on underlying financial instruments and are often used to speculate on those markets. As with FX, it is also possible when trading CFDs to profit from falling prices. It is important to understand that you actually do not own the underlying asset directly (thus it is more cost efficient).
What are the advantages of CFDs?
Besides the fact that it makes trading on the stock market faster and easier, there are three more benefits to trading CFDs…
- Beyond stocks – indices, commodities and more
With CFDs, you’re not just limited to shares in companies. Skilling offers CFDs on indices (like the FTSE 100) and commodities (like oil and gold), as well as ETFs. It opens up a whole load of financial markets to profit from.
- Invest like a hedge fund manager
If you buy a share you’re only able to make a profit if the price goes up. CFDs give you the option to make money if the share price goes down – this gives you the ability to hedge your risks, protect your profits, and take a more proactive approach to the markets.
CFDs are leveraged, which means you can make profits much faster than if you were buying the actual physical shares. Be careful though, as leverage is a double-edged sword – it can boost your potential profits but they can also magnify your losses. To find out more about leverage, read this article.
With CFD trading, you can reduce your costs. No stamp duty or other additional fees such as for account management, are being charged since there is no physical exchange of papers/assets.