CFD (Contract For Difference)

March 11, 2022 in Glossary

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CFD means Contract for Difference. These instruments derive their value from the underlying asset. The benefit for the trader is that you don't have to actually own the asset and you only have to deposit a margin in order to leverage your investment.

With CFDs you can trade assets like stocks, indexex, commodities and other liquid assets.

Example

A trader buys 500 CFDs on Bayer stock.

Bayer shares price increases by 10 €.

Profit: 500 CFDs * 10 € = 5.000€

The payout profile of the CFD is in this case identical with the payout profile of the stock.

Pros and Cons for CFDs

Pros:

  • Less capital commitment, only margin needs to be deposited
  • It is possible to speculate on increasing or decreasing prices
  • Transparent formation of prices
  • Low cost and fast tradability

Cons:

  • Can only be traded by a broker and are therefore an OTC derivative (Over-the-counter)
  • Keeping over night can cause financing cost
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