CFD contract

What are CFDs contracts?

Contracts of CFDs (contract for difference) are otherwise financial derivatives that operate on the OTC market. These contracts are concluded between two parties - the buyer and the seller.

In other words, they consist in the obligation for the seller to pay the difference between the current value of the underlying instruments for which the contract was entered into and their value on the contract date.

Such underlying instruments may be e. g. miscellaneous assets such as bonds, shares, indices, mineral raw materials, commodities and other assets. The assumption of CFD contracts is that its price change exactly corresponds to the change in the price of the underlying instrument, which is often a stock or index quoted on the stock exchange.

It is worth noting that CFD contracts differ from ordinary shares in that the investor does not have to engage directly in the share capital of a given company, and its profits are limited only to changes in the quotation price of shares without the right to a possible dividend. On the other hand, CFDs differ from futures contracts in that they do not expire on a specific date.

Advantages of CDF contracts

One of the advantages of CFDs is that they can be freely shaped and leveraged - e. g. an investor for USD 25,000 can buy a USD 250,000 share contract.

It follows that for this purpose he had to make a deposit of only 10 per cent of the total. If the share price according to his expectations increased e. g. by 10 percent, the leverage will multiply this profit even to tens of percent, unfortunately it also works in the opposite direction in case of losses. Therefore, it is necessary to be careful when investing in these instruments, as the loss of capital is high.

CDF contracts are becoming increasingly popular. They are easy to construct, and investors are tempted by high potential yields, low initial capital requirements and lower transaction costs.