A contract for difference is concerned with the difference in value of a certain share, commodity or currency between the time at which the contract was opened and the time at which it has to be closed. In fact, a CFD is a derivative financial instrument and is not traded in exchanges. It is a tool for investing in any market condition. As well CFD trading gives an opportunity to avoid current positions or to make money when the price of the traded commodity falls.
Actually CFD trading gives traders an opportunity to open positions that are up to 20 times the margin deposit. This feature has made the CFD trading one of the hottest trading instruments in the financial markets. CFDs offer peculiar leverage for traders looking to enhance profits as well as offer flexible tool for investing on the strength or even the weaknesses of index performance or long term assets. But, while margin trading you have higher risk of losing more than the initial investment.
Because CFDs are not for getting the asset and instead are just a contract with the brokers and the tax treatment is quite different. In addition, the trader does not get a direct clear asset in this type of trading. In fact, CFD trading is quite similar to future trading. And so, the trader could sell or purchase the asset for the difference in the spot price later.
As a rule, CFD trading is used by the traders in order to capitalize on the short term fluctuations where the trader could predict a short position or a long position as appropriate.
As a rule, CFDs are traded off-exchange and have a fundamental margin, which means that they allow traders to invest more money than they actually have on their accounts. In fact, it provides the trader with the opportunity to increase any profits and ramp up the earnings potential of any given trade.