What is a CFD contract?

CFD as a trader-broker agreement

The full form of CFD is a contract for difference. At the end and at the beginning of the contract, the broker and the trader agree to exchange the difference in the price of an asset.

In CFD, buying, and selling of assets is done by traders without actually owning them. Basically, the trader predicts the price direction of an asset and if the trader’s prediction is right then the trader earns a profit and if the prediction went wrong then the contract will result in a loss for the trader. The closing of the position totally depends on the trader.

Example CFD trade

Let us understand with an example, Jack buys 1000 stocks of ‘A’ company which costs 20 dollars each. Jack predicts that the price will grow in the future so Jack pays twenty thousand dollars for 100 stocks to the broker.

As Jack predicted, the price of stock increases, and now they cost $25. At this point, Jack closes the contract and sells the stock. So here the forecast of Jack was correct and he receives the price difference of amount $5000 from the broker.

But if Jack’s forecast goes wrong and the stocks drop in price then, in this case, Jack will have to pay the amount to the broker after the contract ends.