What is a contract for differences (CFD)? It is an agreement, when trading financial derivatives, where the differences between the open and close trade price are settled in cash. Unlike futures contracts, there is no delivery of any underlying physical goods or securities.
CFDs allow traders to analyse and predict price movements of securities or other derivatives, and make a bet as to whether the price will rise or fall.
Contracts For Difference
What CFDs are available for trading? Just as with stocks, bonds, futures, and options, there are a host of CFDs available to trade.
- Indexes
- Bonds
- Forex
- Precious Metals
- Energy
- Commodities
- Blue Chip Stocks
Indexes
Index CFDs allow you to speculate on the price movement of a specific stock market index, without owning the underlying asset. Index CFDs allow you to go long or short, and give you the flexibility to trade on margin.
Bonds
Bond cfds are generally traded based on future interest rate expectations. If you predict interest rates will rise, then the yield on the underlying bond will rise, and you might buy a CFD contract on the underlying bond. If you predict interest rates will fall, you might sell a CFD contract on the underlying bond.
Forex
Forex is a combination of the words foreign [currency] and exchange. Foreign exchange is the process of changing one currency into another. Forex trading is expressed in pairs for example, The Australian Dollar paired with the US Dollar or the British Pound paired with the Japanese Yen.
Forex traders want to profit from minute differences in exchange rates between the paired currencies.
The forex market is open 24 hours a day, 5 ½ days a week. Currencies are traded worldwide in the major financial centres. Unlike stocks, bonds or other instruments, forex can be highly active at any time of the day, with price quotes changing constantly.
Precious Metals
Gold, silver, copper and other metals are also traded with CFDs. Gold has become synonymous with the word wealth, and has been used as money throughout much of the world’s history. You can buy or sell physical gold, or you can buy and sell a CFD. With a CFD you don’t take possession of physical gold but can benefit from price fluctuations over the short or long term.
Many investors who hold physical gold, will also trade gold CFDs as a way to add to their portfolio.
Energy
Energy is a highly volatile market, and CFDs are used to capture sudden fluctuations in price to gain profit. Oil, gasoline natural gas, heating oil, and Brent Crude Oil all have very active CFD markets. Many experienced traders favour the high volatility of energy markets to drive profits from their trading.
Many other contracts for difference can be day traded, or even swing traded.
These markets are often highly leveraged, And for that reason may not be suitable for all investors. In any event before you begin to trade CFDs, It is highly recommended you practice paper trading to gain proficiency and confidence in these fast moving markets.
