CFD Basics

General information on the nature of Contracts for Difference and how they relate to FOREX contracts.

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Why Choose Contracts for Difference

Contracts for difference have experienced a dramatic rise in popularity in recent years, supported by the image of contracts for difference as a valuable, if not high-risk component of a profitable, diversified trading portfolio. Their increasing profile has brought CFDs to a wider audience, due to inherent features of CFDs that make them attractive to consumer investors.

Volatility and Leverage

One of the core reasons why CFDs are even traded in the first place is their considerable scope for price volatility and leverage. In terms of making them popular instruments for traders, the lure of a lucrative prize for successful trading has propelled CFDs from an obscure, seldom-discussed instrument to a mainstream product with which private traders the world over are familiar.

CFDs are inherently highly leveraged because they are traded on margin. Margin trading, essentially notionally lending money for the duration of the trade from the broker, allows traders to invest less heavily in a position up-front, so they can reap amplified rewards from incremental price ticks. Broken down, this means that CFDs pave the way for significant returns for less effort - an attractive proposition for traders of all sizes.

Similarly, contracts for difference can be frequently volatile, meaning they can vary significantly in price over a short period of time, which when coupled with the interplay of leverage makes for a particularly lucrative trading setup, and understandably contributes to their popularity.

Please Note - Our service includes products that are traded on margin and carry a risk of losing entire deposit. The products may not be suitable for all investors. Please ensure that you fully understand the risks involved.

Medium-Term Speculation

CFDs are also popular for purely functional reasons. Medium-term speculation, particularly in the commodities markets, can be an expensive process, and the volatility of individual assets will seldom be enough to trump the cost-effective, high-yield nature of CFDs. CFDs represent a more tax-efficient, more cost-effective way to enter the market, allowing traders to buy in at a much lower price point while allowing more significant returns to be generated - a win/win from the trader's perspective.

High Risk, High Reward

Of course, to say CFDs are popular because they are some sort of a dream investment product would be naïve and frankly incorrect - with high rewards comes the natural corollary of high risks, and for this reason CFDs should always be treated with an appropriate degree of caution. However, with such clear practical advantages for the modern trader, be it as part of an investment fund or as a one man trading operation, the rise in popularity of contracts for difference shows no signs of halting.