What are CFDs?

A CFD (Contract for Difference) is an agreement to exchange the difference in value of the underlying instrument between the time at which the contract is opened and the time at which it is closed.

Geared products like CFDs can help you make the most effective use of your investment capital, but it is important to appreciate that the amount you could gain or lose relative to your initial investment is greater for geared products than for non-geared products.

CFDs are margin traded products. You only need to deposit a fraction of the notional trade value of the contract allowing you to make a much larger investment than in traditional cash markets. Your profit or loss is determined by the difference between the price you buy at and the price you sell at. Margin levels required will vary between different CFD products.

A CFD is all of the following:

  • An agreement to exchange the difference between the opening price and the closing price of a contract.
  • A derivative that allows you to trade the price movement of the underlying instrument without actually owning that instrument.
  • A total return swap where cash is borrowed from the counterparty to purchase a contract for the return of an underlying asset from that counterparty. The borrowing cost can either be paid separately as an overnight financing charge or be included in the spread.
  • A leveraged product meaning that only a small amount of collateral (margin) is required as an initial deposit.
  • A trading contract that gives the client the ability to open a long or short position.
  • An OTC (Over the Counter) product meaning you can only close that contract with the counterparty you opened it with.

Trading foreign exchange on margin carries high potential rewards but also high potential risks that may not be suitable for all investors. Before deciding to trade foreign exchange, you should carefully consider your investment objectives, level of experience and risk appetite. Past performance is not indicative of future results, which can vary due to market volatility. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading and seek advice from an independent financial advisor if you have any doubts.

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