What Are CFDs?

What are CFDs?

A contract for difference (CFD) is a financial product that allows you to trade on a number of assets without actually owning them.

You can trade CFDs on a wide range of items, including indices and commodities such as gold and silver. Because you do not own the instrument, you will not be bound by any contract terms, or have to acquire any rights or obligations. This means you are free to trade simply on the question of whether you think the asset will increase or decrease in value.

To make a profit on a trade, all you need to do is sell the item at a higher price than when you bought it. Of course, if you have to sell it at a lower price, then you will have made an overall loss.

Why trade cfds?

One major advantage of trading CFDs is that it can be compared to a kind of insurance policy. Some investors will use CFDs as a way to hedge their trades and minimise their risk.

Assets such as gold are particularly seen as ‘safe havens’ for traders. In times of economic uncertainty and turmoil, you will typically see investors move away from the more volatile currencies and seek refuge with CFDs instead.

CFDs are also exempt from stamp duty for many people, and can be traded with a lot less capital than it would take if you owned the asset. It is worth remembering, however, that using leverage can increase your losses as well as yours profits – so be sure to use it with care.

Expiry and rollovers

All CFD contracts will have a set date at which they mature or expire. If you are trading a particular asset when it reaches maturity, your position will automatically close, and your broker will debit or credit your account accordingly depending on whether or not you finished in profit.

Most brokers will let you trade without this interruption and will automatically replace the expired contract with a brand new one – known as a rollover. When this happens, your broker will take the difference between the old and new price of your contract and debit or credit your account accordingly.

It is also worth pointing out that any pending orders (such as stop loss and take profit) you have on a CFD trade will automatically be removed when the asset expires. If this occurs, you will need to manually add new orders to your open position.

If you do not want your contract to be rolled over by your broker, all you need to do is close any open trading positions before the expiration date.