CFD contracts are one of the types of trading, which provides earnings on the difference in prices of financial assets. Contracts for difference today is the object of increased interest among binary options brokers. Contracts for the price difference in different variations have existed for more than a hundred years.
What are CFDs?
First of all, you need to remember that CFD is not a stock exchange instrument (like binary options). That is, trade with CFDs takes place between the trader and the broker. A single CFD exchange simply does not exist in nature. In this regard, CFDs and binary options are similar. To find out more about the brokers and how to trade CFD, read AvaTrade reviews.
The essence of CFD trading is that the trader and the broker make a kind of bet between themselves, according to which one of the parties will pay the other side the difference between the opening price of the transaction and the closing price of the transaction. To make it clearer, let’s look at the example. Suppose that today’s rate is 0.87 euros for 1 dollar. A trader believes that the euro will rise against the dollar and signs a contract with a broker for USD/EUR growth. Further two situations are possible:
- If the euro grows, the broker will have to pay a trader a difference
- If the euro falls, then the trader will have to pay the broker
At the same time, the time of closing the contract and CFD calculation is not set in advance (as opposed to binary options, where there is a fixed expiration). The trader himself decides, at which point the transaction will be considered closed and, accordingly, what profit or what loss he will receive.