CFD

A Contract for Difference (CFD) is a contract between a seller and a buyer, in which the difference in the price of an asset between the moment the position is opened and the moment it is closed is paid.

This is a tool where a positive difference between the opening and closing prices is paid by the seller to the buyer, and a negative difference is paid by the buyer to the seller.

Examples of CFDs

For example, a buyer purchased 1 CFD of company N for 10,600 points, and sold it for 11,000 points. The difference was 400 points. The trader’s profit, taking into account the fact that the value of one point is 6 dollars, was 6 × 400 = 2,400 dollars.

CFDs can be concluded on different assets. There are contracts for natural phenomena, for example, for the average monthly temperature. Of course, it is clear that the contracted item here is not the weather, but a derived indicator. Here you need to determine the price of one deviation point. In this case, the farmer can insure against crop failure, and the speculator can make a profit for the risks.

The Advantages and Disadvantages of CFDs

The advantages of CFDs include:

• Low capital requirements.
• Hedging.

One of the main disadvantages of CFDs is large spreads.