What they are

Contracts for Differences (CFDs) are a powerful form of derivative that allow traders to take advantage of movements in the price of an underlying asset.

The instruments that can be traded through the CFDs can range from stocks (and market indexes) to commodities and many products in between. With CFDs, traders can take both long and short positions, allowing traders to benefit from both rises and falls in the price of assets. This makes them particularly suited to markets with high volatility and for shorter-duration strategies, such as day trading.

Like other financial derivatives, CFDs allow traders to take positions on a complex array of assets without having to actually assume ownership over any of them. This alleviates traders of the burden of having to deal with the cumbersome regulations often involved in actually buying them - not to mention the hefty commissions that many stockbrokers charge for the service.

Flexibility

This powerful flexibility, an inherent strength of the instrument, allows traders to assemble extremely well-diversified portfolios, spread across both markets and asset classes, with consummate ease - something unheard of when trading more vanilla instruments.

CFDs are highly leveraged - meaning that traders can pay only a small fraction of the cost that owning the underlying asset would actually entail, and there are no fixed lot sizes that could otherwise prevent opening smaller positions. This makes the form of trading an ideal solution for newcomer investors who might want to trade on high-value assets but who lack the starting capital to do so.

Profits made from trading CFDs are also often exempt from taxes normally levied on stock trading, providing a powerful financial incentive to favor them rather than the underlying instruments.

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