What are CFDs?
A contract for difference, or CFD, is simply an agreement between
two parties to pay the difference in price (of the contract) between
the time it is opened and the time at which it is closed. It is a
derivative instrument, which means that when you trade CFDs you
are trading an instrument whose price is based on an underlying
asset that you may already be familiar with. These assets may
include shares (or equities), sectors, commodities, indices or foreign
exchange (FX). Importantly, CFDs are an OTC, or over-the-counter,
product. This means that they are not traded on an exchange, and
that when you trade with CFD provider Markets they are the counterparty to
the transaction.
When you trade CFDs, you don’t actually own the underlying asset.
Instead, you are trading a contract whose value is determined in line
with the value of the underlying asset. The underlying asset could
be shares like Google or BHP Billiton, or it could be a commodity like
cocoa.