What is a CFD?
The term CFD stands for Contract For Difference. This is a contract to exchange the difference in value of a financial instrument (the underlying market) between the time at which the contract is opened and the time it is closed.
What this means is that you select the market you want to trade but rather than making the full physical purchase (or sale) you open a CFD with us instead. This contract will replicate the profit and loss of your intended purchase (or sale).
CFDs are fast growing in popularity as a flexible alternative to traditional share trading, giving you a greater degree of leverage on your investment capital.
How a CFD works
Say you want to buy 1000 shares in BP. You could buy these shares through a stockbroker, paying the full value of the shares (1000 x the current market offer price of BP) plus a commission to the stockbroker.
Alternatively, with Intertrader you could buy 1000 CFDs in BP at the live market price. This would give you exactly the same exposure, but to open this contract you would only have to supply a margin deposit to cover any potential downside, and pay a small commission.
Selling shares through a CFD provider is easy. You just open your contract to go short rather than long, at our bid price. For this reason CFDs are often used by clients who want to hedge an existing investment portfolio.
Although originally devised for equity trading, CFDs are also used to trade indices, forex, energies, metals, commodities and more. Our CFD service covers a wide range of asset classes matching the scope of our spread betting service. As with our equity markets, the charge for all our non-equity contracts is built into the dealing spread.
A CFD is a flexible investment vehicle. For contracts that don’t have an expiry, you decide exactly when you want to close your position and realise your profit or loss.
You trade in the currency of the underlying market (e.g. US dollar for US equities) and your profit or loss is converted into the base currency of your account when your position is closed.
The ability to go short or long with CFDs makes them a popular option for traders who want to hedge against an existing investment portfolio.
Getting started with CFDs
Before diving into things, newcomers should familiarise themselves with the proper terminology of CFDs. You can build your understanding through research, or by opening a demo account, through which you can make risk-free trades using virtual currency.