A CFD is a contract stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time (if the difference is negative, then the buyer pays the seller instead). Positions can be taken on various financial instruments (stocks, indexes, commodities, currencies).
CFDs reproduce the price movements of their underlying assets and allow you to speculated on their increase or decrease in price with a leverage effect.
CFDs are key tools for short-term investors who want to sell short when the markets pull back. They are also useful since your capital can be invested in a wide range of products.
CFDs are not allowed in the USA due to restrictions by the SEC (Securities and Exchange Commission) on OTC (over the counter) financial instruments.
- Diversifying a portfolio with little capital
The leverage effect allows you to multiply your initial investment (including your gains or losses) and you can therefore trade a complete portfolio that includes stock, indexes and commodities without having to block large amounts of money.
- Selling short
By using short positions, you can profit from negative price variations. This technique is also known as "protection", or "hedging". It is particularly useful for shielding your portfolio from a drop in the market.
- No taxes
CFDs do not give you any ownership, so they're not considered as being assets. Therefore, you don't pay any taxes when financial instruments are sold since you never actually bought them.
- Trading at a low cost
Transaction costs are included in the spread between purchase prices and short selling prices (the spread). Fees for CFD transactions are therefore lower than those of regular securities.
- You get to decided when you close your position
Unlike futures and certificates, and other derivatives such as warrants and options, CFDs don't have expiration dates, you can close a position at any time.
- CFDs are negotiated with real-time prices
Variations in the price of a CFD are identical to the variations of the underlying stock or index, and they are calculated in real time. Transactions are processed immediately with no delays, and any gains or losses are also credited or debited in real time.