CFD stands for Contract for Difference, which is an agreement between two parties to exchange the difference between the opening price and closing price of a contract.
Meaning that CFD trading is made between traders and brokers, but not the actual (stock, commodity and indices) market.
CFDs are derivatives products that allow you to trade on live market price movements without actually owning the underlying instrument on which your contract is based.
iForex offers CFDs on shares, indices, and commodities.
How CFDs trading works?
To understand how CFD trading works, you will need to know how the CFD itself started.
1, No CFDs before
Long time ago, there was no CFD instruments at all, but only these stocks, commodities and indices market.
But in that period (long time ago), there was not so many traders but the large hedge funds were trading stocks and indices mainly.
2, Hedge funds losing money
Although these hedge funds were trading with large amount of funds, there was a demerit of trading stocks and indices.
Which is they cannot sell(make profit from the falling prices) in the actual stock and indices market.
If the price in the stock markets falls together, hedge funds simply lose their money.
3, Brokers invented new product
All brokerage companies are seeking to expand its market, and they had come up with a great idea.
The idea is creating another stock market by themselves where traders can sell stocks and make profit by that.
So if someone wants to sell stocks and make profit, these brokers will instead buy the stocks to complete the trades.
This is why the CFD is a derivative product and you don’t own the actual stock by buying the Stock CFDs, because you are actually just buying the price offered by the brokers.
CFDs for anyone
Now, you do not need to buy the actual stocks to make profits, because you can buy/sell stocks online without owning the actual instruments and it is even leveraged up to 1:100.
What you can do with CFD?
You can use CFDs to speculate on the future movement of market prices regardless of whether the underlying markets are rising or falling.
This is the biggest merit of trading CFDs and it is available to every trader.
If you are not looking for the extra dividend which can be earned by owing the actual instruments(stocks), trading CFDs may be the better solution for you.
Difference between Stock CFDs and Stocks?
The difference is just one thing which is: You cannot sell and make profits with actual stocks, but you can buy or sell Stock CFDs and make profits.
The price movement in the CFD market should be the same as the actual stock markets.
Remember that trading CFDs is OTC derivatives, meaning that the broker is always hedging your positions otherwise the trade can not be completed.
This also means that the there is a conflict of interest between traders and brokers.