CFDs, or Contracts for Difference, is a financial instrument similar to an index or share which allows you to trade an underlying index, share or commodity contract without having to own the underlying asset itself.
The CFD price is the price of the underlying asset (whether it is a share, index, or future).
If the price of the underlying asset goes up, so will the price of the CFD.
A major difference is that there are no exchange fees and many of the inefficiencies of trading the underlying shares on the exchange are eliminated.
Also, CFDs allow to use the power of leverage, which is not generally available in equity products.
As a result, CFDs have grown in popularity dramatically over the past few years.
CFDs are not suitable for “buy and forget” trading or long-term positions.
Each day you maintain the position it costs money (if you are long), so there is a time when CFDs become expensive.
For short-term trading they have advantages, provided you get the markets right. But be prepared at some economic stage to cut the position.
Contracts for difference (CFDs) are instruments that offer exposure to the markets at a small percentage of the cost of owning the actual share.
This allows the investor to buy or sell an instrument, which usually costs only 10 per cent of the price of the underlying share.