CONTRACTS FOR DIFFERENCE — how does CFD work in trading?

CONTRACTS FOR DIFFERENCE — how does CFD work in trading?

In today’s Strifor review we will tell you about the tool that attracts the attention of both novice traders and experienced professionals. After all, CFD allows you to earn on price fluctuations of almost any assets without owning them directly. These are currencies, metals, stocks, cryptocurrencies, commodities and raw materials. Sounds tempting, doesn’t it? But what is CFD in fact, and why does this instrument cause so much controversy in the world of finance? Let’s understand how CFDs work and why they can be both a powerful weapon for capital growth and a source of serious risks. 

What is CFD?

CFDs, or Contracts for Difference, are financial instruments that allow traders to speculate on changes in asset prices without actually buying those assets. Contracts are an agreement between two parties: a buyer and a seller. When a trader opens a CFD position, he or she is actually entering into a contract with a broker that expresses the difference between the current price of the asset and the price of the asset at the time the position is closed. If the price of the asset increases, the trader makes a profit; if the price decreases, the trader suffers a loss. 

How did CFDs appear and develop?

CFDs were developed in the early nineties in the UK. Initially they were used mainly by hedge funds and large investment companies for risk management and portfolio optimization. With the advent of online trading, they began to rapidly gain popularity among retail traders. Online brokers began offering CFDs to a wider audience, making it possible to trade with smaller investments and high leverage. And the further emergence of mobile applications and improved functionality of trading platforms allowed traders to trade from anywhere and at any time.

The order of actions when trading CFDs

• Opening a position. A trader chooses an asset and determines whether he will buy or sell a contract on this asset
• Determination of volume. The trader determines the volume of the deal, which can be expressed in the number of contracts or in the monetary amount.
• Fixing profit or loss. When a trader decides to close a position, the difference between the opening and closing price is multiplied by the number of contracts. The resulting amount is either added to the trader’s deposit in the case of a profit or subtracted in the case of a loss.

Risks of CFDs

However, like any financial instrument, CFDs come with certain risks. Strifor Broker considers it important to inform clients about the potential dangers associated with CFD trading to help them make informed decisions, because awareness and honesty are our key principles. 

• One of the main risks of CFD trading is the possibility of significant losses. Using leverage can increase both potential profits and losses. Traders can lose more than they invested if the market goes against them. 
• CFDs are traded in a variety of markets that can be very volatile. Asset prices can fluctuate dramatically in response to economic data, political events, or market speculation. This volatility can increase risk and create unexpected losses.
• CFD trading requires constant monitoring of the markets and up-to-date information. Changes in market conditions can happen quickly and traders must be prepared to react to them. Failure to monitor the market can lead to missed opportunities or increased losses.
• The CFD market is less strictly regulated than traditional financial markets. This can lead to potential risks associated with unscrupulous brokers or inadequate customer protection. Many traders have suffered because of this, so choosing a quality broker is an important step to successful trading. Strifor is a licensed* broker and each of our clients is insured for 20 thousand euros.** We recommend that all traders carefully evaluate their financial goals, risk level and strategy, and do their own research before trading.

The Future of CFDs

How might CFDs change in the future? With new technologies, regulatory changes and trader needs, there are a few key trends that could shape the future of CFDs.

• Increasing automation and algorithmic trading.

With the development of artificial intelligence and machine learning technologies, automated trading will become even more prevalent. 

• Integration with new technologies. Smart contracts and other blockchain-related technologies can improve CFD-related processes such as executing trades, calculating profit and loss, and automating trade confirmation processes.
• In addition, the future of CFDs can be expected to see improved regulation and transparency, a shift to decentralized platforms, an increased focus on risk management, and greater access to new markets and assets. CFDs are expected to become even more accessible, efficient and secure, creating new opportunities for speculation and investment. 

Favorable conditions for CFD trading

Strifor broker provides competitive trading conditions for CFD trading. Analyze the markets, choose the right asset and make deals on the MetaTrader 5 trading platform. Don’t forget to consider risks and control emotions when trading. We are waiting for you in the fascinating world of finance!

Attention! An investment in CFDs carries the high risk of losing all investment funds.  87% of retail investor accounts lose money when trading CFDs with this provider. Past investment success does not mean future success.

* 7 Lucky Trading (Mauritius) Ltd, the operator of the Strifor platform, has a license to operate forex broker No. GB23202670 and is regulated by the Mauritius Financial Services Commission.

** Strifor SVG LLC, the operator of the Strifor platform, is a member of the “Financial Commission” — an independent non-governmental self-regulatory organization for resolving external disputes.