Meaning of contract for difference
A contract for difference is an agreement covering the profit or loss of one position in an underlying commodity asset, such as gold or silver, which takes place on another spot market. It is an instrument that enables traders to trade on large movements in the underlying markets without actually holding any contracts.
In the futures market, a contract for difference represents an agreement that the difference between two prices will be paid to the buyer or received by the seller. When a trader buys or sells CFDs, they are doing so with financial brokers, not with physical assets akin to trading actual commodities themselves. These agreements can either be purchased on margin, or a contract for a different account will be opened with an initial deposit made by the trader.
How does conversion work?
Conversion is based on price movements of the underlying assets, and any profits or losses will be calculated through this conversion. This method can be used to hedge existing positions as well as speculate on specific movements in markets that you feel strongly about.
Unlike the futures market, where a trader is obliged to take delivery of the underlying asset should they win in their bets on price movements, you do not have this same obligation with the contract for differences. Therefore, CFDs are typically traded by speculators and those seeking to profit from fluctuating prices, where they may choose to close their positions as soon as they feel that the market has moved in their favour. Thus, those who expect prices to rise will buy CFDs, and those who believe that prices will fall will sell them short.
In essence, a contract for difference is a method of trading where you speculate on price movements without actually taking delivery of the asset itself. This permits traders to profit from the markets without actually managing the risks involved in being exposed to the commodities themselves. The main benefit of using a contract for difference is that you can switch between long and short positions quickly, with many brokers offering contracts for weeks or even months at a time.
Covered calls are also used within this market by some traders as they are considered a form of protection against adverse price movements. Like many forms of financial trading, there are several ways to trade within the contract for different markets, and it’s important that you fully understand how your chosen broker operates before placing any bets with them.
Legislation in CFD accounts:
In the UK, CFDs are traded on UK-regulated exchanges for the first time. Before this change, CFDs could only be traded over the counter with a broker. The rise of popularity in trading contracts is actually due to recent legislation that made them more attractive to trade CFDs because of the easing of trading restrictions that came into effect in June 2014. The rising popularity has given rise to several online sites like markets.com where one can trade and invest.