Contract for difference is a complex financial instrument that can be used to hedge against volatility in the market. It has many benefits, but it’s important to understand what CFD are before you start trading with them.
In this blog post I will talk about how contract for difference work, and some of the key things you should know when considering them as an investment strategy.
I will start by saying that CFD is a derivative. This means it derives its value from another asset, such as property or currencies.
It’s important to understand this because if you don’t understand how derivatives work then contract for difference can seem like an intimidating financial product and they are often mis-sold in the broker market place due to their complexity.
So let me try and simplify what I mean when I say that CFDs derive there value from something else:
Let’s take oil as an example of other assets which have volatility associated with them, imagine you’re worried about the price of oil going down – so instead of buying physical barrels of oil at whatever current rate is on offer -you could buy contact for difference using your chosen trading platform at the current price of oil.
If you hold this position and prices do go down (you’re bearish) then your contract for difference will go up in value, and you can sell it to lock your profit.
In conclusion, CFD are complex financial derivatives, so it’s important to understand how they work before you start trading them.
