TRADING GLOSSARY

CFD (Contract for Difference): trading without ownership

A Contract for Difference (CFD) is a financial derivative that lets you speculate on price movements without owning the underlying asset. When you trade a CFD, you enter a contract with a broker to exchange the difference between the opening and closing price of a position.

How CFDs work

If you buy a CFD on a stock at $100 and it rises to $110, you profit $10 per contract. If it falls to $90, you lose $10 per contract. You can also sell (short) a CFD to profit from falling prices. CFDs are available on stocks, indices, forex, commodities, and cryptocurrencies.

Advantages

Leverage: CFDs offer leveraged trading, meaning you can control a larger position with less capital. Short selling: Easy to go short — no borrowing of shares required. No stamp duty: In some jurisdictions, CFDs are exempt from stamp duty because you do not own the underlying asset. Diverse markets: Trade thousands of instruments from a single platform.

Risks

Leverage risk: The same leverage that amplifies gains also amplifies losses. Overnight financing: Holding CFDs overnight incurs daily financing charges. Counterparty risk: Your contract is with the broker — if they go bankrupt, you may lose your funds. Regulatory restrictions: CFDs are banned for retail traders in the United States and heavily regulated in other jurisdictions with leverage caps (e.g., 30:1 in the EU).

Disclaimer: This is for educational purposes only and does not constitute financial advice. Trading involves significant risk of loss.

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AskTrade analyses are AI-generated and do not constitute financial advice.