A CFD is a simplified over-the-counter (OTC) instrument, which is an obligation that guarantees that at the end of the contract the difference between the value and the current value of the asset will be transferred between the parties.A distinctive feature of CFDs as an instrument for trading and speculative operations is the possibility to make money on fluctuations in the value of the underlying asset underlying the contract, without having this asset.As a basic asset can be used not only goods, but also exchange indices (Dow Jones 30 Stock Index, Euro Stoxx 50 Index, etc.) and other exchange instruments. For example, in the form of a derivative from a share purchase agreement, CFDs give the trader the opportunity to speculate on price volatility without formalizing the ownership of the shares.
Advantages of working with CFD
- Availability, determined by the absence of the need for physical transfer of goods during transactions;
- Reducing the time required to acquire the underlying asset on the stock exchange;
- the ability to open both buy (long) and sell (short) positions without having the underlying asset;
- possibility to conclude a transaction on financial instruments in the required volume at any time;
- the ability to trade with leverage;
- online transactions on the classic stock market.
These advantages of CFDs largely determine the growing popularity of the instrument among traders and activate the corresponding brokerage services. For example, in March 2015, global broker Tickmill introduced eight CFDs on key indices in the United States, Japan, Europe, Germany and the United Kingdom and on WTI crude oil into its product line.
Features of working with CFD
The essence of CFD trading is the conclusion of a contract to buy/sell an asset with deferred delivery, in which the parties initially know that the actual delivery of the asset does not imply the actual delivery of the commodity obligations, and the closing of the transaction is ensured by the “mirror” purchase/sale of the same volume of the asset. The duration of such a contract is not normally established and is terminated upon application by the party entitled to do so.The contract for price difference provides an opportunity to make a profit both on the growth and on the fall of the price of the underlying asset.CFDs are often traded in complex lots, for example, if a lot consists of ten shares – that’s how many shares should be bought (sold) in one transaction.CFD trading is not round-the-clock – for example, the session on contracts for shares starts at 17:30 and closes at midnight. After the session is closed, the financial result is counted, all mandatory payments are accrued; open positions are carried over to the next trading session. Pending orders are automatically withdrawn (they can be executed only during the current session).
Similarities and differences between CFDs and binary options
CFDs are very similar to binary options. In particular, they provide trading in the selected asset with profit, regardless of the trend direction. The general features of the instruments should also include the independence of the asset purchase/sale term (limitation of trade obligations of the parties to the contract, use of the prevailing contract in the assessment of profit).However, trading CFDs involves a trader’s access to a sliding scale, which allows to exponentially increase or decrease the size of profit or loss. To trade CFDs and currencies on the Forex market, it is enough to have one trading account.