NO1: What is a contract for difference (CFDs)?

What is a contract for difference?

According to the risk warning of Contracts for difference (CFDs) issued by the European Securities and Markets Authority (ESMA) on February 28, 2013: "A contract for difference is an agreement between a buyer and a seller to exchange the difference between the current price and the original price of the relevant asset (stock, currency pair, commodity, index) at the end of the agreement."

At present, most of the foreign exchange currency pairs, precious metals, indices, stocks, and commodities traded by retail foreign exchange brokers to traders are conducted in the form of contracts for difference.


NO2: What are the characteristics of contracts for difference (CFDs)?

From this definition, we can see the characteristics of CFDs:

1. There are many types of underlying assets for CFDs. Not only stocks and currency pairs can be used as trading assets, but also commodities, precious metals, indices, etc. can be used as trading underlying assets. Taking Exness as an example, the CFDs products currently provided mainly include: foreign exchange currency pairs, precious metals, crude oil, and virtual currencies.


2. CFDs are financial derivatives transactions. In fact, the buyer and seller will not actually purchase the relevant assets (stocks, currency pairs, commodities, indices), but only a contractual agreement based on the asset price.


3. Since CFDs transactions are only contractual agreements based on asset prices, only part of the margin needs to be deposited with the broker to calculate the difference between the opening price and the closing price of the foreign exchange currency pair. If the difference is positive, the CFDs broker will pay the difference to the trader. If the difference is negative, the CFDs broker will charge the difference.


4. Since CFDs transactions are margin transactions, leverage issues are inevitably involved. At Exness, we give traders unlimited leverage as the maximum leverage to help professional traders test their own trading strategies.


5. CFDs are derivative transactions. While they are profitable, they are also high-risk. Traders need to be cautious when trading.


NO3: What are the profitability and risks of CFDs?

CFDs are traded in the form of margin, which is inherently leveraged. It is a double-edged sword for traders. While amplifying profits, it may also lead to amplification of losses.

In fact, in the early days when CFDs were created, they were in the merger and acquisition activities of the stock market. Because CFDs transactions are exempt from stamp duty, can be leveraged, and are extremely concealed, they were used in corporate mergers and large stock transactions in the 1990s.


Later, with the development of the Internet, a company called Gerrard & National Intercommodities (GNI) launched CFDs to private clients and the retail market through its online trading agency GNI Touch.

Since then, CFDs have become popular in the retail market.
However, for traders, CFDs are profitable but also highly risky. Traders may lose all their funds, so they may not be suitable for all investors.