Every week we provide insights into popular assets and hot questions, so you can easily learn more about the investment market in bite-sized pieces.
In this Markets in Focus we take a closer look at CFD trading—what it is, how it works, and where it originates.
What is CFD Trading?
CFD (Contract for Difference) trading is a fast and flexible way to speculate on the price movements of various assets, including stocks, indices, currencies, commodities, and even cryptocurrencies. It allows traders to potentially profit from both rising and falling markets without actually owning the underlying asset.
How Does CFD Trading Work?
When you trade CFDs, you are essentially entering a contract based on the price movements of an asset. If the asset’s price moves in your favor, you make a profit; if it moves against you, you incur a loss. However, you never actually own the asset itself.
For example, instead of purchasing Apple shares, you can trade a CFD on Apple’s stock price. The contract is between you (the trader) and the broker, with profits or losses determined by the difference in price from when you open and close the trade.
Example of a CFD Trade
Suppose you predict that Apple’s stock price will rise. You buy a CFD when Apple is trading at $ 240 per share.
• If Apple’s stock price increases to $ 250, you earn the $ 10 difference as profit.*
• If Apple’s stock price drops to $ 230, you incur a $ 10 loss.*
*Additionally, CFD trading often involves leverage, with Apple (Stock) 5x. This means that you can trade with more capital than you initially invest. While this amplifies potential profits, it also increases risk. In the above example with a leverage of 5 your result would have been a profit or loss of $ 50 ($ 10 price change 5x leverage = $ 50).
The Origins of CFDs
CFDs were developed in the early 1990s by two UBS bankers, Jon Wood and Brian Keelan. Initially, hedge funds used them to gain exposure to shares on the London Stock Exchange without purchasing physical stock. Since then, CFDs have become a widely used financial instrument, especially with the rise of online trading platforms like Change.
We wish you a successful trading week on the Change App.
Until next week!
