Introduction to CFD Trading

Contracts for difference (commonly referred to as CFDs) are leveraged derivative products that specifically track the value of an underlying asset.

First offered in the U.K. in the 1980s as an alternative to exchange-traded products, CFDs allow investors to invest or trade a specific underlying security without the need for ownership and physical settlement.

Your profit (or loss) from CFDs is based on the difference between the reference price of your contract and the pricing of the underlying security - as the name might suggest, a literal contract for the difference between prices. The underlying security can range from indices, local stocks, international stocks, commodities such as oil, wheat, and precious metals and other investing options that may otherwise be ordinarily unavailable to retail traders.

Like FX, CFDs are traded over-the-counter (OTC) and not on a specific exchange. Investors may take long or short positions to take advantage of rising or falling markets.

Some CFDs follow an expiration calendar like futures contracts, while other CFDs don’t expire but are rolled overnight (subject to a financing charge on the leveraged amount of the position).

What are some of the advantages of CFDs?

Subject to the features of each specific CFDs, the services of the CFD provider and the regulatory regime that governs their distribution, the advantages of CFDs may include:

1. Lower margin requirement than a comparable exchange-traded security
2. Flexible contract sizes
3. Lower execution costs
4. Stamp duty exemption
5. No physical settlement
6. No borrowing costs for short share CFD positions
7. Participation in corporate action
8. Exposure to international markets
9. Asset diversification
10. The ability to carry a hedged position (both long and short) in the same CFD
11. Risk management tools for monitoring risk and liquidating losing trades

What are some of the risks of CFDs?

As with any investment option, CFDs come with risks. If you utilize the increased leverage available for CFD trading, you increase your potential exposure to both profit and loss.

Some of the risks and disadvantages associated with CFDs are:

1. Counterparty risk, or the default risk of the CFD provider
2. Market risk based on leveraged trading
3. Expiration risk of certain contracts
4. Financing and/or rollover charges
5. Limited access to some issues via share CFDs
6. No voting rights via share CFDs

Want to learn more?

One great way to learn more and practice the fundamentals of FX & CFD trading is through a practice account before committing funds for trading in a live account.

To learn more about the fees associated with trading FX and CFDs at Questrade, you can visit our pricing page.

If you have any other questions about trading FX and CFDs, you can contact us - we’ll be happy to help. Once you open and fund an FX and CFD account you will get access to complimentary training sessions helping you to learn how to trade CFDs within our platform.