Last Updated on: 19th February 2021, 08:54 am
A contract for difference (CFD) is a type of derivative that is commonly traded in the financial market. Besides this, it is referred to as a contract between two parties (the buyer and the seller), and according to this contract, the seller is obligated to pay the difference (current value minus contract value) to the buyer, while in the case of a negative difference, the buyer will settle instead.
It is 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.
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