Contract for Difference (CFD)
What Are CFDs (Contracts for Difference)?
A Contract for Difference (CFD) is a financial contract between a buyer and a seller where they agree to exchange the difference in the value of an asset from when the contract is opened to when it’s closed. It allows traders to profit from price movements without actually owning the underlying asset, like stocks, commodities, or cryptocurrencies.
For example, your analysis of the current markets means you believe that Tesla stocks are going up. So you buy a CFD stating that within a certain time period the price will rise. If that happens, you make money. If it doesn’t, you lose money.
How It Works
- Speculation on Price: With a CFD, you’re not buying the actual asset (like a stock or cryptocurrency); instead, you’re speculating on whether the price will go up or down.
- Profit or Loss: If you think the price will rise, you open a "buy" position, and if the price goes up, you make a profit based on the price difference. If you think the price will fall, you open a "sell" position, and if the price drops, you make a profit. If you guess wrong, you lose money.
- Leverage: CFDs often use leverage, meaning you only need to deposit a small percentage of the trade’s value to control a larger position. This can amplify both profits and losses.
When you open a CFD, you're not actually paying for the underlying asset itself (like buying a Bitcoin). Instead, you typically pay a few things:
- Margin: To open a CFD position, you need to deposit a percentage of the total value of the trade, known as the margin. For example, if you're trading a CFD on Bitcoin at $30,000 and the margin requirement is 10%, you would need to deposit $3,000 to open the position. (On Ouinex, we leverage CFDs up to 500:1, but it differs depending on the type of derivatives you’re trading.)
- Spread: The spread is the difference between the buying price (ask) and the selling price (bid) of the CFD. When you enter a trade, you'll usually pay the ask price, which is higher than the bid price. This difference is a cost that can impact your potential profits. (On Ouinex, you will see your spread in real time, so you know that cost. On most platforms, spreads aren’t visible right when making the trade.)
- Fees and Commissions: Some brokers charge a commission for trading CFDs or may have additional fees for holding positions overnight (known as overnight financing or swap fees). (On Ouinex there are none for derivatives, including crypto perps.)
- Potential Losses: If the price moves against your position, you could incur losses based on the difference between the opening price and the closing price when you decide to exit the position.
In summary, you're mainly paying the margin to open the position, along with any spreads or fees charged by the
Example
Let’s say you open a CFD on Bitcoin at $30,000, betting that the price will go up. If the price rises to $32,000, you’d make a profit on the $2,000 difference (minus any fees). However, if the price drops to $28,000, you’d lose the $2,000 difference.broker. Your potential profit or loss will depend on the price movements of the underlying asset.
Key Takeaways
- A CFD lets you trade based on price changes of an asset without owning the asset itself.
- You can profit from both rising and falling prices, but losses are also possible.
- Leverage allows you to control larger trades with less money upfront, but it increases the risk of bigger losses.
In short, CFDs give you a way to bet on the price movements of assets without owning them, offering the potential for profit, but they come with significant risk due to leverage.