Contracts for difference (CFDs) are a type of financial derivative, which work as an agreement to exchange the difference in price of an asset from when the position is opened to when it is closed. CFDs can be used to speculate on the future price of a variety of markets, including shares, forex, commodities, cryptocurrencies, indices and bonds.
When trading CFDs, the underlying asset is never exchanged between the buyer and seller, and neither party needs to physically own it to begin with – CFDs are a purely speculative product. And because there is no need to own the underlying asset, CFDs can be used to take advantage of both rising and falling markets – known as ‘going long’ and ‘going short’.
CFDs are traded on leverage, which means that traders can benefit from magnified profits, but could also incur magnified losses.