1.4 - An ABC on CFDs

CFDs are ‘Contracts for Difference’. They allow you to more easily trade a wide range of products, such as; stocks and shares, energy and metals, as well as cryptocurrencies and forex. In fact, CFDs make it possible to trade over 5,000 different financial products.

When you ‘open’ a Buy/Sell trade via a CFD, you open a contract between yourself and another party, such as your brokerage. You never actually hold the asset, but when the contract is complete and you close your position, the difference in value between your buying and selling prices is calculated by your broker and shared as a profit or loss.

This system of trade enables you to make a profit when selling if the value of the asset goes down, as well as buying when the price goes up. This can seem a little confusing to some people because you don’t have to already have US dollars in an account if you want to sell them via a trade. Your broker will essentially use their own dollars to trade with, as if they were yours. So if you close your sell trade and prices have gone down, they’ll be able to buy back for less than what it was sold for. This positive difference in costs is shared with you as profit from the trade.

The experience is very similar to that of trading the actual product, with the movement of price resulting in gains or losses to your funds.

CFDs have only been around since the early 1990s and first started in London. Hedge funds and traders were the first, followed later by retail traders as they were made available to the mass market and became more popular.

When it comes to trading crypto, you can avoid making transactions through unregulated markets and via digital wallets by using CFDs instead. As your broker is essentially trading the crypto on your behalf, the process can be much more streamlined and secure.

Trading CFDs can really quite simple, but these are ‘sophisticated’ financial products. The more money you intend to invest, the more time should be invested understanding the finer-points and how best to use them.

Risk-mitigation (minimising) tools such as a ‘stop-loss’ are universally installed across all trading platforms and are there to help you keep to your defined strategy and trade responsibly. There’ll be more detail on stop-losses and similar tools that help you keep on top of your trades in a later chapter…

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