What are CFDs (Contract for Difference)?

Modified on Thu, 31 Jul at 10:40 AM

A Contract for Difference (CFDs) are financial derivatives that allow traders to take advantage of market movements by speculating on whether an underlying financial asset moves up or down. CFDs are bought and sold like any other trading instrument, the difference is you don't have to own the asset or instrument you're trading.

It is a contract between two parties, typically described as “buyer” and “seller”. Let's say you believe the price of Crude oil is going up, you would buy a Crude Oil CFD and you would then close the position by selling the CFD. Your profit (or loss) would be the difference in the price of the CFD between the time you entered and closed your position.

CFD trading allows traders to leverage their capital (by trading amounts far higher than the funds in their account) with all the benefits of trading securities.

CFD Calculations:

Margin Requirement Formula for CFDs = (number of lots *contract size*market price)/ leverage

Example:

For a 10 barrel Crude Oil Trade, with a Market Price of $64.00

Margin Requirement= (0.01 (10 barrels) * 64 *1000 (contract size) )/25 (leverage on crude) = 25.6 USD