What is CFD trading? Definition & Meaning

The term Contracts for Difference already explains to the investor in the name that the essence of the product relies on the difference in the instrument. This is a contract or an agreement and investors seek to exploit the difference for a profit. Of course, you will need to know what this agreement is about. A CFD is a financial derivative which means that you, as an investor, can bet on or benefit from price fluctuations.

The basis for this is the changes in the prices of the underlying instruments to which the respective CFDs refer. This may be the price of a particular stock, as well as the stock value of commodities or entire indices. The trading of CFDs on precious metals, interest rates, futures, or currencies is also possible for investors.

Thus, the trading of CFDs is in no way the classic trading on the stock market. For traders, further information on stocks is available via our nextmarkets guides, such as What are Stocks? and Stocks and Shares for Beginners.

Our CFD definition should give you a good basis to go further into the meaning of CFDs. One of the most important things to keep in mind while learning the process of CFDs, is that their critical value is always the difference in price between the entry and exit of the contract. Similar to buying and selling a stock, except that you use leverage with CFDs.

This multiplies the price fluctuations by its value – positive and negative. This difference between entry and exit is referred to internationally as the spread and determines profit or loss.

Often, this spread is also the leeway that a CFD broker can afford to earn money as it sets the terms of the CFD offer. Trading with leverage is covered further on in this article.

Before you can plan the right CFD strategies or even try out CFDs on the nextmarkets free trading software, you need to acquire the basic skills of trading. The most important tool here is the leverage. So what is CFD trading and how does CFD trading work?

Here is an illustrative CFD trading example: You decide to open a CFD that relates to one X share. In your case, it is a long position, so you only benefit from rising values ​​(as opposed to the short position). For this, you deposit a so-called margin as collateral, which determines the leverage.

In our example, the margin is 10% and thus ensures that you can enter into a long trade with a value of £1,000 with only £100. If you have chosen correctly and the price rises from £1,000 points to £1,010 points, you gain £100 euros when closing the CFD.

Regardless of whether you’re targeting stocks or looking at other products with your CFD, you’ll never be completely risk-free. Likewise, with the direct purchase of a stock, companies can go bankrupt and you, as an investor, can lose your invested capital. What are CFD Stocks? Find out in our detailed guide for beginners.

The leverage in CFDs, however, ensures that this process can theoretically happen faster. On the other hand, it also allows you to make money quickly. With great opportunities also comes greater risk. In this case, possible large profits mean that equally large losses are possible.

A possible CFD trading risk also exists where some traders are unprepared for market shifts. For instance, this can happen when they purely want to make a profit on the best CFD trading app. Therefore the mantra: When is CFD trading at the lowest possible risk? With a well-prepared trader. Register now at nextmarkets!

The main selling point for contracts for difference is certainly that you, as an investor, can make a profit even with the smallest amounts on your nextmarkets trades. That would not be possible without CFDs on some stocks. For example, you could buy a CFD on a single stock, which in some cases would not be possible on the stock market itself. In addition, the leverage ensures that a small amount of money can generate significantly higher profits than you would expect when buying a stock or something similar.

Another advantage is the time aspect of CFDs. They are not tied to specific terms and can be closed spontaneously using CFD software. As the volatility increases, the potential winners will be quicker to large sums of money. Accordingly, CFDs do not have to be kept for years to generate a profit.

It takes a lot of experience in the finance industry to be serious and knowledgeable about CFDs. Just knowing “What are CFDs?” is often not enough. At least not to be successful in the long term. Therefore, you should be experienced as an investor or learn from an experienced coach.

A contract for difference is especially interesting as an investment if you are the type to experience the thrill of trading and take risks as part of the investment portfolio. Often CFDs are fast trades. For example, the development of the crypto-currency Bitcoin has opened up the door to an additional type of CFD.

You should, therefore, be a nextmarkets trader who always keeps a cool head. For the classic long-term trader, there are certainly other options that could fit better.

In order to minimize the CFD trading risk even further, it is a good idea to practice trades before trading with real funds. The best way is of course in a demo account. At nextmarkets, we not only provide you with experienced coaches, but also offer you the opportunity to open a demo account. The broker demo account can be used for free and indefinitely with nextmarkets.

Not only can you put your own skills to the test, but you can also test how to trade with the analysis of our professionals. Thus, you quickly learn from a professional yourself and go deeper into CFD trading.

For a platform to be the best CFD broker, it not only has to offer products but also provide sufficient and honest information. If you are interested in testing these financial derivatives yourself and possibly including them into your financial portfolio, then rely on our system of curated trading. Open a demo account and become an expert in the field of CFDs. There are various markets and options available, regardless of whether you prefer to invest in commodities, equities, or indices.