What is a ‘Contract For Differences – CFD’

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What is a ‘Contract For Differences – CFD’

A contract for differences (CFD) is an arrangement made in a futures contract whereby differences in settlement are made through cash payments, rather than by the delivery of physical goods or securities. This is generally an easier method of settlement, because both losses and gains are paid in cash. CFDs provide investors with the all the benefits and risks of owning a security without actually owning it.

BREAKING DOWN ‘Contract For Differences – CFD’

The CFD is a tradable contract between a client and a broker, who are exchanging the difference in the current value of a share, currency, commodity or index and its value at the contract’s end.

Advantages of a Contract for Differences

CFDs provide higher leverage than traditional trading. Standard leverage in the CFD market is as low as a 2% margin requirement and as high as a 20% one. Lower margin requirements mean less capital outlay and greater potential returns for the trader. Also, the CFD market is not bound by minimum amounts of capital or limited numbers of trades for day trading. An investor may open an account for as little as $1,000. In addition, because CFDs mirror corporate actions taking place, a CFD owner receives cash dividends and participates in stock splits, increasing the trader’s return on investment.

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