Contracts for difference allow traders to exchange the difference between an asset’s value at the start and end of a contract, without buying the underlying asset. Traders can take long or short positions and leverage their trades at a reasonable cost. Contracts for difference are available for equities, sectors, currencies, commodities, and global indices. The entry or exit price is not restricted, and positions can be closed out at any time during the trading day. Fees are payable on both opening and closing trades.
A contract for difference is a contract between two parties to exchange the difference between the value of an asset at the inception of a contract and its value at the end of a contract. The asset to which the contract relates could be a currency, a stock, a commodity or an index. The payment made between the parties is equal to the difference in the price of the asset at the beginning and at the end of the contractual period. Contracts for difference have become popular because they provide the opportunity for traders to take long or short positions and leverage their trades at a reasonable cost. Using contracts for difference, traders can take advantage of asset price movements without having to buy the underlying assets.
If a person buys a contract for difference when the price of an asset is $150 US dollars (USD) and sells when the price of the asset is $200 USD, the buyer receives payment of the $50 USD difference; if the asset’s price drops to $50 USD, the buyer must pay the $100 USD difference. An investor entering into a negotiation-for-difference contract is not buying the underlying asset and may have to pay a deposit to the supplier which amounts to a small fraction of the price of the underlying asset. This allows an investor to gain considerable exposure to the market with the potential for larger gains or losses.
Contracts for difference do not expire but roll over at the buyer’s option at the end of the trading day. A person can trade long by opening a position that will profit from an increase in price. The investor can also trade short by opening a sell position that would benefit from a decrease in price.
Underlying assets for which contracts for differences are available include equities, entire sectors, currencies, commodities and global indices. The entry or exit price from contracts for difference is not subject to any restriction. A position in a contract for difference may be closed out at any time during the normal trading day by a second trade to reverse the original short or long position. The fee is payable on both the opening and closing of a trade. Other than that, the particular broker may impose terms and conditions which vary from one broker to another.
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