What is CFD trading? CFD means “CFD Trading”. In finance, a derivative contract for difference essentially is an agreement between two parties, usually defined as “buyer” and” seller”, stipulating that at the agreed upon date, the buyer will sell to the seller the difference in the value of an underlying asset and its price at contract maturity. CFD trading is basically the process of buying one asset at a low price and selling it at a high price.
CFD trading is highly leveraged, meaning traders will often be holding positions of a number of CFDs and therefore control a large portion of the market. Leverage is a very important feature of CFD trading, which is why many CFD trading platforms are leveraged, allowing smaller investors to enter the market and potentially take advantage of leverage without being themselves leveraged (i.e. their holding position is not equivalent to the total amount of money in their account). The European Commission is currently looking closely at this practice as it may have a negative impact on the CFD trading industry regulation.
CFD trading is generally used by hedge funds and speculators who wish to speculate on trends in financial markets without entering directly into an actual position. A trader may use a CFD trading platform to “speculate” on the underlying asset without actually buying and selling the product; this is also known as a “leverage play”. CFD trading platforms allow traders to speculate on the movements of the underlying asset without the risk and potential costs of actually purchasing and holding the asset. Speculators and hedgers typically use CFD trading platforms to speculate on movements in the underlying asset, but there are also CFD speculators who use the platform to “hedge” or reduce their overall risk by trading with margin.