Understanding Contracts for Difference

A Contract for Difference (CFD) is a Specified Investment Product. You can speculate on the future market movements of the underlying asset without really owning or taking physical delivery of the underlying asset through the use of a contract for difference. CFDs are financial instruments that are leveraged. CFDs are often traded over-the-counter with a securities firm, which is referred to as a CFD provider.

In addition to stocks, commodities, and foreign exchange, trading CFDs are accessible for a wide variety of underlying assets.

How It Works

First and foremost, a trader should look for a broker that provides CFDs. You then choose an asset and start a contract. This results in an open position, which you can subsequently close out by engaging in a reverse trade with the CFD provider at a different price.

If the initial transaction involves buying or taking a long position, the second trade is a sell position which closes the contract.

In contrast, if the first transaction is a short or sell position, a buy position closes the trade.

The price difference between the initial deal and the closing trade of the underlying asset is captured by CFD.

Holding a Long Position

A CFD provider will compensate you for the difference in closing prices between the CFD’s opening and closing out prices if the closing price is greater than or equal to the opening price.

If you sell your CFD at a lower price than you bought it at, you will be obligated to pay the difference in price between the CFD’s open and close prices to the CFD provider.

Holding a Short Position

A CFD provider will pay you any difference between the opening and closing out prices for a CFD if it closes at a lower price than it opened at the beginning.

It is your responsibility to pay the CFD provider any difference between the opening and closing out prices of a CFD if the closing price of the CFD is larger than the opening price.

Commissions, financing costs, other fees, and other changes made by trading CFDs will be deducted from the proceeds you pay or get as a result of your transaction.

Costs of CFD Trading

Bid-offer spreads, commissions, daily financing expenses, account administration fees, and Goods and Services Tax are all possible costs associated with CFD transactions.

Typically, commissions are charged as a percentage of the entire value of the underlying shares, and they are paid on a transaction-by-transaction basis. It is possible that a minimum commission per transaction will be charged. As an alternative, the cost of trading services may be quoted in the form of an interest rate differential between the bid and offer price on a CFD. It is necessary to confirm this with the CFD provider before engaging in CFD trading.