What is a CFD?
The CFD, or contract for difference, is a retail investment tool that is common throughout Europe, and is quickly being adopted throughout the rest of the financial world. Originally used by institutions and major corporations to manage exposure risk on the equity market, CFDs have found their way into retail traders' portfolios as an efficient alternative to physical share trading. Basically, a CFD is an agreement between traders and brokers (buyers and sellers) to mark the price of a given financial instrument when the trade is opened, then settle the difference between the opening and closing price of said financial instrument, multiplied by the number of lots, or leverage, that was traded.
Trading CFDs offer all the benefits of trading financial products without having to physically own them; they are a way of buying and selling risk and a compelling tool to hedge long term investments.
CFDs trades can be opened on equities, stock indices, futures, commodities, and many other instruments. As mentioned before, CFD trading is leveraged so an initial deposit by the trader controls a much larger amount of money for buying and selling financial instruments. CFDs are often traded on approximately 1% margin, where a $1000 deposit allows control of $100,000 for the sake of transactions.