Contracts for difference, better known as CFDs, are one of the most widely used trading instruments in today’s financial world. They may sound complicated at first glance, but once you strip away the jargon, trading CFDs becomes surprisingly easy to understand. Traders love them because they allow participation in global markets without actually owning the underlying asset.
 

When you open a trading account, you can take a CFD position on assets like gold, the euro, or even the Dow Jones index, speculating on price movements without physically buying them. This flexibility makes CFDs ideal for both beginners looking to get started and seasoned traders exploring new strategies. Whether managing one trading account or several, understanding how trading CFDs and opening a CFD position work is key to navigating financial markets effectively.
 

CFDs explained: A plain-language introduction

 
At their heart, trading CFDs involves financial contracts between a trader and a broker. The two parties agree to exchange the difference in the price of an asset between the moment the contract is opened and when it is closed. If the selling price moves in the trader’s favor, they make a profit. If it moves the other way, they face a loss. This mechanism makes CFDs accessible to both experienced traders and retail investors looking to enter global markets without owning the underlying assets.

What is a contract for difference CFD? Basic definition

 
A contract for difference is a derivative instrument that mirrors the price of an underlying asset. Instead of buying shares of a company or a barrel of oil, you trade CFDs that follow the asset’s sell price and overall market movements.

How contracts for difference differ from owning the underlying asset

 
When you own shares in a company, you have shareholder rights such as dividends or voting. With a CFD, you only speculate on market price changes. You never actually own the share, commodity, or currency. This makes CFDs flexible, allowing retail investors to access global markets, but also inherently speculative in nature.

CFD trading,  who uses CFDs, and why

 
CFDs attract a wide range of traders because of their versatility.

Typical profiles of CFD traders

Retail traders often use retail investor accounts to trade contracts for difference (CFD) for quick speculation. Experienced traders may use them to hedge portfolios or test strategies in fast-moving markets.

Institutional vs retail participation in the CFD market