Skillsfirst Level 3 Certificate in Introduction to Financial Trading (RQF) - UNIT 1: Principles of financial trading
Skillsfirst Level 3 Certificate in Introduction to Financial Trading (RQF) - UNIT 2: Principles of Financial Planning and Cash Flow in Financial Trading
Skillsfirst Level 3 Certificate in Introduction to Financial Trading (RQF) - UNIT 3: Understanding financial trading techniques

CONTRACT FOR DIFFERENCE (CFDS)

A CFD (Contract for Difference) is an agreement to exchange the difference in the value of an asset from the time the contract is opened until the time at which it is closed. With a CFD, you never actually own the asset or instrument you’ve chosen to trade, but you can still benefit if the market moves in your favour. This is because a CFD is a derivative product which has a value based on an underlying asset.

CFDs are traded between individual traders and CFD providers. Unlike traditional markets CFDs have no standard contract terms and will vary by each CFD provider.

A CFD position is started by entering a trade on a particular instrument with the CFD provider. This creates a ‘position’ in that instrument. The position or contract you take with the provider will generally have no expiry date. The profit or loss on the position is calculated when you close the trade and it is calculated using the difference between the opening trade and the closing trade price. The profit and loss paid will usually be subject to other charges made by the CFD provider, these can include commission, overnight financing costs of holding the position, bid-offer spread or account fee’s.

Even though the CFD does not expire, any positions that are left open overnight (after trading hours) will be ‘rolling’. This typically means that any profit and loss is realised and credited or debited to the client account and any financing charges are calculated. The position then carries forward to the next day.

CFDs like many products are traded on margin, which means the trader must keep and maintain the minimum margin level at all times in their account. Should the amount of money deposited with CFD provider drop below minimum margin level, margin calls can be made by the provider. Traders may in some circumstances have to cover these margins quickly otherwise the CFD provider may liquidate their positions.

Scroll to Top