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CFD stands for Contract For Difference. It is a financial derivative product allowing traders to speculate on how the price of an asset will move. The asset could be stocks, commodities or currencies. The trader doesn’t actually own the asset, instead they are making a bet on whether it’s going to rise or fall in value. If they guess right they make a profit; guess wrong and they lose.
The trader takes out a contract with a broker, without considering the actual value of the asset, only the change in price over the duration of the contract. CFDs are popular with traders because are flexible, allowing traders to trade on both falling and rising markets. Traders can also use leverage to increase possible returns; however this also magnifies the risk.
Trading CFDs involves a high degree of risk and traders should consider their risk tolerance before taking out a CFD.
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