What is a CFD, we all here about CFDs and CFD trading, but what is a Contract for Difference, find out in this inrtoduction
Introduction to CFDs / Contract for Difference
What is a CFD?
A CFD or Contract for Difference is an agreement between two parties to exchange, at the close of the contract, the difference between the opening price and the closing price, multiplied by the number ofreference shares specified within the contract.
The ‘reference shares’ are the underlying shares specified in the CFD. The economic performance of a CFD is determined by the performance of the underlying reference shares.
Although CFDs replicate the price movement of the underlying reference shares, they convey no right or requirement to acquire or deliver the physical shares. (i.e. you don’t actually own the shares)
The contract value of a CFD is defined as the number of reference shares specified in the contract, multiplied by the price of the underlying reference share. If you take a long position, you will make a profit if the contract value increases. Conversely, if you take a short position, you will benefit if the contract value falls.
You can, therefore, profit from both rising and falling share prices. It is important to note that CFDs are a margined product and as such are not suitable for all investors. Due to the leveraged nature of the product you may loose far in excess of your initial investment.
You can find out more about CFDs at www.StartTradingCFDs.co.uk