What are CFDs? | FXTM Global (2024)

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What are CFDs? | FXTM Global? ›

Understanding what CFDs are

A contract for differences (CFD) is an agreement between a buyer and a seller that stipulates that the buyer must pay the seller the difference between the current value of an asset and its value at contract time.

CFD trading​ enables you to speculate on the rising or falling prices of fast-moving global financial markets, such as forex, indices, commodities, shares and treasuries. Get tight spreads, no hidden fees and access to 12,000+ instruments. Get tight spreads, no hidden fees and access to 12,000+ instruments.

Introduction to contract for difference (CFD)

The general meaning of CFD is 'contract for difference', which is known as a contract within an investor and an investment bank or even a spread betting firm, generally in the short-term.

The primary reasons for the ban are concerns over the lack of transparency and the risks associated with leveraged trading. CFDs are over-the-counter (OTC) products, meaning they are traded directly between parties without going through a regulated exchange.

Example of a CFD

An 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.

CFDs may be considered a high-risk product due to its leverage nature, which is why it is vital for any new investors to understand the potential risks and how to mitigate them effectively. Leverage risk is the main concern for CFD traders.

Computational fluid dynamics (CFD) is the science of using computers to predict liquid and gas flows based on the governing equations of conservation of mass, momentum, and energy. Fluids are all around us and sustain our lives in endless ways.

CFDs can be quite risky due to low industry regulation, potential lack of liquidity, and the need to maintain an adequate margin due to leveraged losses.

Computational Fluid Dynamics (CFD) is the analysis of fluid flows using numerical solution methods. Using CFD, you are able to analyze complex problems involving fluid-fluid, fluid-solid or fluid-gas interaction.

Why do so many people lose money with CFDs? ›

CFDs are a leveraged product

This means that while you could make a potential profit if the market moves in your favour, you could just as easily make significant losses if the trade moves against you and you don't have adequate risk management in place.

Research and analysis are probably the two key distinctions between CFD trading and gambling. Whereas CFD trading is heavily based on extensive monitoring of markets and understanding data, gambling is not.

There are three problems with the conventional CfD: produce-and-forget incentives, distortion on intraday and balancing markets, and the fact that volume risks remain unhedged.

CFD trading can be attractive to beginner traders, but it also involves significant risk. First, beginner traders should make sure they understand the basics of CFD trading, including leverage, margin and stop-loss orders. It's also crucial to choose a reputable and regulated CFD broker.

CFD trading allows you to trade with leverage, which means you can control a larger sum of money with a small deposit. It can increase your profits but also amplify your losses. Stock trading typically does not involve leverage, so you need to have enough money to buy shares directly.

CFDs allow traders to go short, speculating on the price of a stock to go down, while with shares dealing the only direction is long. CFDs allow for the use of leverage, which can magnify both profits and losses. CFDs offer access to more markets, such as indices, commodities, forex, and futures.

Over-leveraging. CFDs are highly leveraged financial derivatives, making them incredibly risky. While leverage allows CFD traders to control larger positions with a smaller amount of capital, it can very quickly escalate losses when the market moves against you.