A CFD, short for Contract for Difference, is an agreement between an account holder and an issuer of CFD. The price of a CFD depends on an Underlying Reference Instrument, which is normally a share, commodity, index, index futures or any other financial instrument traded in a stock, commodity or currency exchange.
A CFD issuing company may offer different types of accounts but the features that govern CFD trades are the same for all types of accounts.
Salient Features of a CFD
-CFD is primarily a speculative product.
-A CFD is not ownership of the Underlying Reference Instrument.
-A CFD cannot be traded in an exchange.
-The profit or loss that an account holder makes is the difference between the CFD price at the time of opening and closing of positions multiplied by the number of CFDs traded. This is regardless of whether a single or multiple positions were created in a CFD. However, in the end, the opening and closing positions must be equal and opposite of the opening order.
-All transactions (opening and closing of positions) relating to a CFD can be made only with the same issuer and not with any third party.
-The issuer may charge a pre-agreed commission and finance and rollover charges on each CFD entered into with the account holder.
CFDs are speculative products and offered over-the-counter. Since it is an unregulated market, it is of utmost importance that people interested in CFDs educate themselves. Of particular importance is the risk involved, regardless of the fact whether you are buying or selling a CFD.
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