What is a Contract for Difference (CFD)?

A Contract for Difference (CFD) refers to a contract enabling two parties to agree to trade on financial instruments based on the price difference between entry and closing prices.

If the closing trade price is higher than the opening price, then the seller will pay the buyer the difference, which will be the buyer’s profit. The opposite is also true. That is, if the current asset price is lower at the exit price than the value at the contract’s opening, then the seller, rather than the buyer, will benefit from the difference.

Learn more about CFD

CFDs are financial derivatives that allow traders to take advantage of prices moving up or prices moving down on underlying financial instruments and are often used to speculate on those markets.

It is a contract between two parties, typically described as “buyer” and “seller,” to settle the difference in the value of a financial instrument between the time at which the contract is opened and the time it is closed.

It allows traders to leverage their capital (by trading notional amounts far higher than the money in their account) and provides all the benefits of trading securities without actually owning the product.

In practical terms, if you buy a CFD at $10 then sell it at $11, you will receive the $1 difference. Conversely, if you went short on the trade and sold at $10 before buying back at $11, you would pay the $1 difference.