A contract for difference (CFD) is a type of financial derivative. It is an agreement between the buyer and seller that states that at any time during the life of the contract, one party will pay to the other party either some fixed number of units or shares in some underlying asset, index, or commodity – at a price determined by reference to some variable such as its current market value- on condition that there has been no default on either side’s obligations before delivery of those assets.
The CFD is often used by investors wishing to take advantage of favorable movements in prices without buying and selling physical commodities themselves.
A CFD is a contract that can be traded and settled in cash to describe it in simple terms. A buyer of the CFD makes payments to the seller, usually at regular intervals for as long as they wish to stay in their position.
The buyer’s obligation is equal to the notional purchase price (i.e., its market value) minus any funds which have been paid out already. At the same time, an existing holder would only need enough margin on deposit with their broker-dealer or FCM to meet this requirement should it become due immediately.
The Final Word
The party who pays more becomes either long or short futures contracts: if one buys a Contract For Difference (CFDs), he becomes ‘long,’ and vice versa when selling.