Originating in the year 1990 in London, Contract for Difference quickly spread like wildfire and saw a massive rise during the 2000s. Jon Wood and Brian Keelan, the original inventors of the CFD primarily made it available for hedge funds to efficiently hedge their exposure with a small margin in the London Stock Exchange.
To make an ideal CFD trading explanation, it is a derivative form of trading where investors speculate whether the price of an underlying asset is going to rise or fall in the future. Only the difference in the opening and closing price of an asset is received by an investor and he/she never holds it physically.
The trade takes place between a trader and broker, who provides the former with an option to invest in foreign currency, indices, commodities, currency bonds, and shares. As CFD gives the advantage of leverage, traders can buy a large position by just by investing a small amount.
For better explanation here is an example how a CFD trade proceeds.
Example – Going Long and Short:
As mentioned above traders can not only speculate the rise of an asset but also its fall.
Steve decides to buy shares in company A. He thinks its price will rise in the coming times. He sets up a CFD with his broker to buy 1000 shares at $5 each, the total amount of which is $5000.
His broker charges a 5% margin and so takes only $250 to give Steve the entire position.
Price of the shares rises to $6 and now the total amount goes up to $6000. The difference between the initial and current price is $1000 which Steve receives as the profit.
Again, to get an additional idea about CFD trading explanation, Steve thinks that the price of the shares might go down. He can also take a position with his broker. If the price does go down, he will receive the difference as the profit.
What are the trading sessions for CFD assets?
CFD offers a diverse range of underlying assets to trade in and thus comes with significant advantages.
All of major pairs get traded through CFD viz. EUR/USD, USD/CAD, USD/JPY, AUD/USD, NZD/USD, USD/CHF, and GBP/USD from 21:00 to 22:00 through Sunday to Friday.
Apart from the above, few brokers also offer more than 300 currency pairs for forward and spot trading.
Traders looking for a clear-cut CFD trading explanation also can check out the products failing under commodities. These include metals, agricultural products, and energy.
Gold, silver, platinum, palladium, copper are some of the products falling under metal. Trading for these products is conducted through Sunday to Friday usually from 23:00 to 22:00.
Agricultural products include wheat, soybean, oats, rough rice, live cattle, feeder cattle, cotton, corn, coffee, cocoa, and others. These have various trading sessions some of which are even conducted daily.
Products included in energy are natural gas, crude oil, heating oil, gasoline, and others. Sunday to Friday is the days for their trading usually from 23:00 to 22:00.
Indices differ from with brokers and are generally FTSE 100, China A50, UK 100, Germany 30, Australia 200, and others. These have various trading days and sessions.
A solid knowledge of CFD trading explanation can help individuals especially beginners to get a grip on the instrument. However, traders locate in the US cannot conduct CFD trade as it is not available there.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.