A Contract For Difference (or CFD for short) is a contract between two parties (usually a broker and their client) for the difference between the value of an asset at the time the trade was taken and the time the trade was closed. Unlike with futures contracts there is no time limit on a Contract For Difference, CFDs never expire.
The two parties that form the contract are usually described as the buyer and the seller. The buyer is the party that stands to gain from the value of the asset risking and the seller is the party that stands to gain from the value of the asset falling. The buyer is therefore the party with the long position and the seller is therefore the party with the short position.
The advantage of CFDs is that they allow traders to speculate on margin on the value of assets such as shares and commodities without the need to actually own the underlying assets. Being able to speculate on margin also means that traders don’t actually need to have the funds that they would need to have to actually buy the underlying assets. This means that traders who trade using CFDs have access to leverage.
Contracts For Difference are common in the United Kingdom and throughout the European Union and European Economic Area as well as Australia, New Zealand, Canada, Singapore, Hong Kong, South Africa and Japan. Contracts for difference are not available in the United States of America.
The best CFD brokers
are not always the same as the best Forex brokers
. And sometimes brokers that are great for trading Forex are not great for trading CFD. Sometimes great Forex brokers don’t even offer CFDs; one example of this might be Dukascopy Europe which although it is great for trading Forex does not even offer CFDs. CFDs are attractive to many traders as they allow traders to take long and/or short leveraged positions on a huge number of different assets without the need to actually own the assets in question. If you are interested in trading CFDs as well as Forex you need to ensure that your broker offers both Forex and a wide range of CFDs on favorable terms, although this will not be an option for you if you live in the USA.