Contracts for difference (CFDs) are a type of derivative that have become very popular recently. Although not in North America, more in Europe. This is because they are illegal in the USA as of now. Many people have started to move to them, away from the traditional areas of investment you may know of. So, in this article, we will discuss what CFDs are and how they work.
What are CFDs?
CFDs are derivates that one can customise for practically any underlying asset. But hold on though, what are derivates? Derivatives are contracts where people do not have to own an asset. They speculate on the price of an asset and see where things go from there. For some derivatives, this means that you will trade the asset in the future. For others, you do not ever have to involve yourself with the asset itself. A trade can go into action only once people meet the conditions of a trade. This is great for people that worry about the risks associated with owning an asset.
For CFDs in particular, you never have to own any assets. You can also base them on any asset. Basically, what you do is find an asset, be it a commodity, stocks, etc. Then, you see where the price is likely to go, and set the CFD accordingly. This means you are essentially betting on the price that an asset will have in the future. This is unlike most trading. There, you may be speculating on the price of an asset, but you still have to own it at some point in time. It is not so with CFDs.
They set up a trade with someone, usually through a broker, and see what happens. There are no set dates for CFDs, so you can end a trade whenever you like.
The great part about this is that a trader never has to worry about buying or selling an asset. As long as you agree with someone beforehand, the trade can go through.
