A CFD is an agreement to exchange the difference between the buyer and the seller to exchange the difference between the entry and the exit price: for example, if you buy a CFD at £10 and then sell it at £12, you will receive a profit of £2 on your CFD trading account:
Instead, if you sell at £8, you will receive a loss of £2 on your CFD trading account.
CFD mirrors the price movements of the underlying asset.
However since you don't own the entire amount of the underlying, a share for example, you are required to deposit just the initial margin (a % of the CFD total value amount) to your CFD provider.
For example, if the CFD total value amount is £20.000 and the initial margin is 5%, you are allowed to trade up to 20 times your initial margin: in this case you will deposit £1.000 to trade up to £20.000.
Due to gearing (or leverage), these financial derivatives could cause losses above 100% of the initial margin.
If a CFD position is kept open for the following day, you can keep it position open indefinitely because a it is rolled forward every day, after the underlying trading hours closing.
Going Long and Going Short CFDs.
If you buy a CFD, you are taking advantage of the underlying financial asset up-move. In this case you pay a daily % of the yearly financing cost but you are receiving dividends, if paid.
If you are short of a CFD, you are taking advantage of the underlying financial asset down-move. In this case you receive a daily % of the yearly financing cost but you are losing dividends, if paid.
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