What are CFDs?

Contracts for difference (CFDs) are a popular way of trading on the price of cryptocurrencies, stocks, indices, commodities, and forex without owning the underlying assets. Instead of buying the asset (as you would when investing), you trade on the rise or fall in its price – usually over a short period of time.

Essentially, a CFD is a contract between a trader and a counterparty (sometimes a broker, sometimes the market itself) to exchange the difference in value of an underlying security between the opening and closing of a position.

With CFDs, you can profit on a market by speculating on its price rising (known as going long) or on its price falling (known as going short). And because a CFD enables you to trade using just a fraction of your position's value – known as trading on margin or leveraged trading – you can open larger positions than your initial capital may otherwise allow.

When you trade CFDs, you're entering into a contract with your broker to exchange the difference in the price of an asset from when you open the position to when you close it. If you think the price will rise, you open a long position. If you think it will fall, you open a short position.

One of the key advantages of CFDs is leverage. This means you only need to deposit a small percentage of the total trade value (known as margin) to open a position. While leverage can amplify your profits, it also increases your risk, so it's essential to understand how to manage risk effectively.