CFDs are financial derivatives that are used to speculate on price movements. When using the CFD of stocks, the trader does not become the owner of the physical stocks. Thus, he is not entitled to a share in profits of the company or to any decision-making powers. On the other hand, stock exchange fees do not apply and CFD trading is faster and easier than traditional assets.
Unlike equities or currencies, CFDs began to be used relatively recently – in the 1990s. They were initially used by investment institutions to hedge against movements in share prices. Later, they have become a product on the market for small investors and traders.
Simply, a CFD is created by opening a position and ends by closing it. It is possible to speculate on a fall or rise in prices. When the position is closed, the trader’s speculation is equal to the actual course of the price. There is a realization of profit or loss.
This is further multiplied by the use of financial leverage, which allows replenishment of the volume of equity by often a significantly higher volume of external capital. Trading with a higher “amount” thus leads to an increased profit or loss.