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CFDs - description and characteristics

CFDs - description and characteristics

created Paweł MosionekAugust 25 2019

CFDs are the foundation of Forex currency brokers' offers. Sam Forex the English abbreviation for international exchange refers to the currency market. Still, Forex brokers rarely only offer trading on these instruments. The main pairs (on a global scale) can be mentioned around 10. The next pairs are already treated as less popular or even exotic and few investors trade on them (except for trading the native currency).

To enrich their offer and offer the investor more options for trade diversification, often brokers equip the platform with another type of assets which are derivatives. These instruments include futures, forwards, options, swaps and contracts for differences. Record holders offer even several thousand on one platform. He is the leader among Polish brokers X-Trade Brokerswhich has almost 4000 instruments on offer.

What are CFDs

With CFD - Contracts For Differences - is an agreement between two parties to the transaction (buyer and seller), where the subject may be any asset (stock, bond, commodity, etc.), and the main condition is the settlement of the difference in purchase prices at the moment of the transaction (profit or loss).

It is a very similar instrument for futures contracts (Futures) with two small differences. CFDs do not have an expiry date, which means you can hold your position for any length of time, unless the broker reserves otherwise, and the acquisition of CFDs does not entitle you to physical delivery of the item to which you refer. In other words, we do not become the owners of the assets that are included in the contract.

CFD is a derivative instrument, i.e. based on another instrument, e.g. stock exchange index, the price of agricultural or industrial goods, stock prices of companies or bonds. The CFD contract may also be based on another derivative, eg a futures contract, which is already a derivative and relates to one of the aforementioned assets.

CFD brokers

It is impossible to choose one broker that would offer the most favorable trading conditions for all CFDs. It often happens that we have to make our choice dependent on the market in which we plan to trade. That is why we have prepared thematic summaries that contain the most important elements of the offers to help you choose.

CFDs - Advantages and Disadvantages 

unlimited liquidity (we conclude transactions with the entity creating the market) higher fees than for futures contracts
the ability to buy and sell at any time (same as on currencies) possible conflict of interest with the broker
large cross-section of markets in one place unfavorable values ​​of swap points for the investor if they occur
financial leverage
in some cases none swap points

Things to know

  1. Swap points - they are usually not charged when trading CFDs and holding positions overnight. However, it happens that some brokers charge them. In this case, they are usually of little benefit to the investor and discourage from playing long-term.
  2. rolling - in futures contracts there is a rollover, that is, the settlement of the difference in rates when one series of contracts expires and the other enters into force. CFDs do not have an expiry date and can be based on futures. When a futures contract is settled, the quoted difference is added to or subtracted from the balance sheet of the CFD positions and is usually shown in the swap column.
  3. Dividend - in the case of CFDs on shares, you can ask yourself what about the dividend, if the company pays it, and we are not, in fact, its shareholders, but we have an instrument that is based on shares. To prevent anyone from feeling disadvantaged, dividends are also paid to long CFD holders as a swap (although it is not). When we have an open short position, the appropriate value is subtracted from its balance sheet (also in the swap column).
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About the Author
Paweł Mosionek
An active trader on the Forex market since 2006. Editor of the Forex Nawigator portal and editor-in-chief and co-creator of the website. Speaker at the "Focus on Forex" conference at the Warsaw School of Economics, "NetVision" at the Gdańsk University of Technology and "Financial Intelligence" at the University of Gdańsk. Twice winner of "Junior Trader" - investment game for students organized by DM XTB. Addicted to travel, motorbikes and parachuting.