Contract for Difference (CFD)

A CFD (Contract for Difference) is a derivative financial instrument where two parties (a trader and a broker) agree to exchange the difference in the price of an asset between the time the position is opened and closed.

You do NOT own the underlying asset (stock, gold, index, etc.).
You are only trading price movements.

How CFD trading works (step by step)

Long vs Short (very important)

🔼 Going Long

You profit when the price increases.

Example:

Buy at 100
Sell at 110
Profit = +10

🔽 Going Short

You profit when the price decreases.

Example:

Sell at 100
Buy back at 90
Profit = +10

⚠️ This ability to profit in falling markets is a key feature of CFDs.

Leverage explained in depth

Leverage allows you to control a large position with a small amount of capital.

Leverage	Margin Required
1:10	10%
1:50	2%
1:100	1%
1:500	0.2%

⚠️ Risk of leverage

A 1% price move with 1:100 leverage = 100% gain or loss
Losses can exceed expectations if risk is unmanaged

Costs in CFD trading

1️⃣ Spread

Difference between Bid and Ask
Paid when opening a trade

2️⃣ Commission

Some brokers charge commission (usually on stocks)

3️⃣ Overnight / Swap fee

Charged if you hold a position overnight
Based on interest rate differentials

CFD vs owning the asset

Markets available via CFDs

CFDs allow access to global markets from one account:

Forex – currencies
Commodities – gold, oil, silver
Indices – Nasdaq, Dow Jones
Stocks – global equities
Cryptocurrencies – price exposure only

Are CFDs regulated?

CFDs are legal and regulated in many jurisdictions
Regulation depends on the broker’s license (FCA, ASIC, CySEC, etc.)
Some countries restrict or ban retail CFD trading

👉 Broker selection is critical.

Key advantages & disadvantages

✅ Advantages

Trade rising and falling markets
High capital efficiency
Access to global markets
Fast execution

❌ Disadvantages

High risk due to leverage
No ownership benefits
Psychological pressure
Broker dependency