Common Features of Contracts for Difference (CFD)

Depending where you are trading Contracts for Difference (CFD) in the world, there are a few common features of these leveraged trading instruments.

 

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How CFD's Work

Let’s use a case study to illustrate how CFD’s (Contract’s For Difference) work. So lets take Australian listed Woodside Petroleum (WPL) and assume the price is at $50. After our technical or fundamental analysis we have decided whether we want to sell (going short) or buy (going long) the stock (or the CFD). Say we go long (buy the stock) and decide to risk $1 on each point of fluctuation in Woodside’s share price.

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Risky CFD's

If you’re looking into trading CFD and have been doing your due diligence before playing with fire, you would definitely have heard from someone that CFD’s are risky. Super risky. And they aren’t too far from the truth. They are. So you need to be super careful when you do start trading CFD’s. So why are CFD’s so risky?

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What is a CFD?

CFD is the abbreviation of Contract for Difference. And that’s exactly what it is, a contract for the difference of the value of the underlying equity or security. Very simply put there are two parties, you the trader and the broker, provider or dealer. You (the trader) initiate the CFD deal with your dealer by buying long or selling short a certain security. The security can be anything such as stocks listed on the US Dow Jones or the Australian Stock Exchange or any currency traded in the foreign exchange (forex) markets.

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CFD Trading FAQ

So here you are reading the CFD Trading Frequently Asked Question (FAQ) page. I’m sure if you’re a CFD n00b (net speak for newbie) you’ll find this page very helpful.

 

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