A CFD (Contract for Difference) is an agreement to exchange the difference between the opening and closing price of the position under the contract on various financial instruments. CFD trading is an effective and convenient speculative instrument for trading shares, indices, futures and commodities.

The main feature of CFD is that the instrument under the contract is not really shipped in the process of trading. It means that, for example, you can buy a contract for difference (CFD) on 200 shares of IBM instead of buying 200 shares of IBM on an exchange. It is convenient because you can make a deal concerning offered financial instruments at any moment and to the full extent, which would be difficult in case of trading actual exchange contracts.

CFDs are getting more and more popular in the world's trading practice because they allow traders both (buyer & seller) to get speculative profit and to hedge their investment portfolios in case they are unprofitable. The latter can be done in those cases when the investor makes a loss from the shares of some companies, but does not want to sell them. In this case he has a great opportunity to hedge his risks by making a contract for difference on the shares of this issuer thus securing himself against further losses and leaving his investment portfolio unchanged.

CFD is a margin product. In other words, all deals with these contracts are made according to the same pattern as those with currency on the FOREX market, including providing certain leverage. Deposit margin may differ for various instruments.

The basic CFD advantages are:

• Short trades : Contracts for difference allow traders to go short as easily as long, which was earlier available only for professional investors. But with the help of CFDs, short positions become more effective regarding their cost and simpler regarding their establishment than share dealing.
• Low commission and margin requirements : You can perform operations without having a deposit that covers the entire sum of the contract, but only margin that is 5 - 10 percent from the amount of the contract. This allows you to make portfolio investments without binding all your funds.
• Hedging : Hedging an existing portfolio is a popular use of CFD's. If you do not wish to liquidate your "real" stock portfolio for some reason, you can quickly and efficiently secure it by selling the appropriate CFD's for a short or long period, until you feel more confident about the market again.
• Leveraging : Leveraging an investment up to 10 times – under normal conditions - is by no means a necessity for all investors. But for aggressive, risk-willing investors, this feature is probably the most important advantage of CFD’s. Of course, you can use as much or as little of the maximum leverage as you wish depending on your willingness to take risks.

More about CFD’s

The risks - CFD's are not for everyone :-
The power of leverage can work against you just as quickly as it can make you profits. So if you get the markets wrong, always remember to apply adequate risk management strategies. Both losses and profits may accumulate up to 10 times faster than non-leveraged positions when using the full leveraging opportunities of CFD’s. Of course, the leverage is only there if you want to use it.

Financing costs :-
When you buy a CFD, you are in effect borrowing money to pay for the CFD. You must therefore pay interest on the amount borrowed, so the financing costs on long positions (when you buy CFD’s) must be taken into consideration, especially if you hold the CFD for a long period of time. Short positions (when you sell a CFD) incur no financing charge since you do not need to borrow funds for this trade type.