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.
CFDs provide higher leverage than traditional trading. 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.
Most CFD brokers offer products in all major markets worldwide. Because of stock, index, treasury, currency, commodity and sector CFDs, traders of different financial vehicles benefit.
The CFD market typically does not have short-selling rules. An instrument may be shorted at any time. Since there is no ownership of the underlying asset , there is no borrowing or shorting cost.
In addition, few or no fees are charged for trading a CFD. Brokers make money from the trader paying the spread. A trader pays the ask price when buying, and takes the bid price when selling or shorting. Paying the spread on entries and exits prevents profiting from small moves, while decreasing winning trades and increasing losses by a small amount over the underlying asset. Because each day a trader holds a long position costs money, a CFD is not suitable for buy-and-hold trading or long-term positions.
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