What Are CFDs?

What are CFDs?

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

You can trade CFDs on a broad 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 it’s similar to a form of insurance. Some investors will use CFDs as a way to hedge their trades and minimise their risk.

Assets such as gold are considered ‘safe havens’ for traders. In times of economic uncertainty and turmoil, 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 far 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 profits – so be sure to use it with care.

Expiry and rollovers

Most contracts for differences will have a set date at which they expire. If a trader still has an open position once the asset reaches maturity, this will usually be closed and the trading account debited/credits according to whether the investor was in profit or a loss.

Some CFD brokers will clients to trade without this interruption, and automatically replace expired contracts – known as a rollover. They will also debit/credit a trading account according to the price difference between the two contracts.

Any pending orders, such as stop loss or take profit, are automatically removed if a rollover occurs, and must be manually added again. If you do not want your contracts to roll over, please make sure you close any open positions before the maturity date.