What are CFD’s?

In our last video we discussed the evolution of the FX market in recent years and how it has reached Retail FX trading.

Retail FX trading is a small segment of the overall foreign exchange market. Individuals do not actually buy or sell currencies. You don’t need to have yens in your pocket to buy pounds, or Swiss francs to buy Russian roubles. It is a speculation on the direction of the exchange rate between two currencies through contracts for differences (CFDs).

If you expect the rate of a currency pair to go up, you enter a long position (this is like buying the base currency and selling the variable).

If you believe that the rate will go down, you initiate a short position (selling the base currency and buying the variable).

But what is a CFD?

A contract for difference (CFD) paper is a financial instrument that allows market participants to speculate on the market movements of an asset without actually owning the asset. CFDs are derivatives that allow traders to speculate on both prices going up and prices moving down on underlying financial instruments and are often used to speculate in those markets. The CFD is a contract between two parties: The investor (buyer of the contract) and the broker (seller of the contract). It states that the seller will pay the buyer the difference between the current value of the underlying asset and its value at “contract time”. If the difference is negative, the buyer pays the seller.

In our coming video, we’ll have a deeper look on how margin and leverage work.