what is a contract for difference cfd 
a contract for difference cfd is an arrangement made in financial derivatives trading where the differences in the settlement between the open and closing trade prices are cash settled there s no delivery of physical goods or securities with cfds contracts for difference are an advanced trading strategy used by experienced traders and they re not allowed in the united states 1investopedia julie bangunderstanding contracts for difference cfd cfds allow traders to trade in the price movement of securities and derivatives the financial investments that are derived from an underlying asset cfds are essentially used by investors to make price bets as to whether the price of the underlying asset or security will rise or fall cfd traders can bet on the price moving up or down traders who expect an upward movement in price will buy the cfd those who see the opposite downward movement will sell an opening position the buyer will offer their holding for sale should the buyer of a cfd see the asset s price rise the difference between the purchase price and the sale price are netted together the net difference representing the gain or loss from the trades is settled through the investor s brokerage account an opening sell position can be placed if a trader believes that a security s price will decline they must purchase an offsetting trade to close the position again the net difference of the gain or loss is cash settled through their account transacting in cfdscontracts for difference can be used to trade many assets and securities including exchange traded funds etfs traders will also use these products to speculate on the price moves in commodity futures contracts such as those for crude oil and corn futures contracts are standardized agreements or contracts with obligations to buy or sell a particular asset at a preset price with a future expiration date cfds allow investors to trade the price movements of futures but they re not futures contracts by themselves cfds don t have expiration dates containing preset prices they trade like other securities with buy and sell prices cfds trade over the counter otc through a network of brokers that organize the market demand and supply for cfds and make prices accordingly they re not traded on major exchanges such as the new york stock exchange nyse the cfd is a tradable contract between a client and their broker they re exchanging the difference in the initial price of the trade and its value when the trade is unwound or reversed cfds allow investors to trade the price movement of assets including etfs stock indices and commodity futures cfds provide investors with all of the benefits and risks of owning a security without actually owning it cfds use leverage allowing investors to put up a small percentage of the trade amount with a broker cfds allow investors to easily take a long or short position or a buy and sell position leverage can amplify gains with cfds but leverage can also magnify losses extreme price volatility or fluctuations can lead to wide spreads between the bid buy and ask sell prices from a broker the cfd industry isn t highly regulated and it s not allowed in the u s traders are reliant on a broker s credibility and reputation investors holding a losing position can get a margin call from their broker requiring the deposit of additional funds advantages of a cfdcfds provide traders with all the benefits and risks of owning a security without actually owning it or having to take any physical delivery of the asset cfds are traded on margin the broker allows investors to borrow money to increase leverage or the size of the position brokers will require traders to maintain specific account balances before they allow this type of transaction trading on margin cfds typically provides higher leverage than traditional trading standard leverage in the cfd market can be as low as a 10 margin requirement and as high as a 50 margin but it can vary significantly by broker lower margin requirements mean less capital outlay and greater potential returns for the trader 2fewer rules and regulations surround the cfd market as compared to standard exchanges as a result cfds can have lower capital requirements or cash required in a brokerage account as a result traders can often open an account with a broker for as little as 1 000 a cfd owner can also receive cash dividends increasing the trader s return on investment because cfds mirror corporate actions taking place most cfd brokers offer products in all major markets worldwide traders have easy access to any market that s open from the broker s platform cfds allow investors to easily take a long or short position or a buy and sell position the cfd market typically doesn t have short selling rules an instrument may be shorted at any time there s no borrowing or shorting cost because there s no ownership of the underlying asset few or no fees are charged for trading a cfd brokers make money from the trader paying the spread the trader pays the ask price when buying and takes the bid price when selling or shorting the brokers take a piece or spread on each bid and ask price that they quote disadvantages of a cfdthe spread on the bid and ask prices can be significant if the underlying asset experiences extreme volatility or price fluctuations paying a large spread on entries and exits prevents profiting from small moves in cfds decreasing the number of winning trades and increasing losses the cfd industry isn t highly regulated so the broker s credibility is based on its reputation and financial viability cfds are not available in the united states as a result cfds trade using leverage so investors holding a losing position can get a margin call from their broker this requires that additional funds be deposited to balance out the losing position leverage can amplify gains with cfds but leverage can also magnify losses traders are at risk of losing 100 of their investment the trader will also be charged a daily interest rate amount if money is borrowed from a broker to trade example of a cfdan investor wants to buy a cfd on the spdr s p 500 spy an exchange traded fund that tracks the s p 500 index the broker requires 5 down for the trade the investor buys 100 shares of the spy for 250 per share for a 25 000 position from which only 5 or 1 250 is paid initially to the broker two months later the spy is trading at 300 per share and the trader exits the position with a profit of 50 per share or 5 000 in total the cfd is cash settled the initial position of 25 000 and the closing position of 30 000 300 100 shares are netted out and the gain of 5 000 is credited to the investor s account 