Published on : 19 May 20202 min reading time
Apparently, the name CFD comes from the acronym Contract For Difference, which can be interpreted as “contract for difference”.
Principle of CFDs
Obviously, in this type of contract, commonly known as a CFD, two distinct parties called respectively “seller” and “buyer” agree to the subscription of a financial contract. In any case, this contract stipulates the sale of the difference between the purchase price at the time of subscription and the sale price of an Underlying Interest at a later date. Of course, if the difference is positive, it follows that the buyer benefits from the difference in the price of the asset, which is the subject of the contract. Otherwise, it is the seller who wins the stake.
Functional analysis of CFDs
Generally speaking, it should be noted that the subscription of a CFD gives access to a bet on the rise or fall in the value of an underlying asset, based on an anticipation of the price variation at a later date than the date of subscription of the contract. It has been noted that CFDs differ from equity trading in that speculators in a CFD are not required to be owners of the Underlying Interest. In addition, it should also be noted that the maturity of CFDs has no time limit. This is an unavoidable opportunity for an individual investor who has a good grasp of the situation to speculate on the deterioration of the financial markets.
Trading CFDs allows the realization of huge profits.
Among other things, CFDs sometimes allow considerable profits to be made depending on the price trend of the underlying. For information purposes, it should be noted that the underlying appears, at times, as a CAC 40 share or a currency in Forex trading. In addition, commodities of all kinds can be the subject of CFDs on the financial markets like gold, silver, oil and many others. Ultimately, it has been identified that CFDs allow for the benefit of leverage. In other words, taking a position at a value significantly higher than that actually available in the account can greatly increase the gains from the differences in the favourable case of price movements. Even so, in the opposite case, there could be a considerable loss of money compared to the speculator’s initial investment.