Contracts for difference allow traders to exchange the difference in value of an asset at the beginning and end of a contract, without actually buying the asset. Traders can go long or short and profit from price movements, with exposure to stocks, sectors, currencies, commodities, and indices. Commission is paid when opening and closing a trade, and brokers may impose varying terms and conditions.
A contract for difference is a two-party contract to exchange the difference between the value of an asset at the beginning of a contract and its value at the end of a contract. The asset to which the contract refers 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 contract period. Contracts for difference have increased in popularity as they offer the opportunity for traders to go long or short and take advantage of their trades at a reasonable cost. By using contracts for difference, traders can profit from asset price movements without actually buying the underlying assets.
If a person buys a contract for difference when the price of an asset is $150 US Dollars (USD) and sells it when the price of the asset is $200 USD, then that buyer receives the difference payment of $50 USD; If the price of the asset falls to $50 USD, then the buyer must pay the difference of $100 USD. An investor who enters into a difference trading contract is not buying the underlying assets and may have to pay a deposit to the provider that is equal to a small part of the price of the underlying asset. This allows an investor to gain considerable exposure to the market with the possibility of further gains or losses.
Contracts for difference do not expire, but are renewed at the buyer’s choice at the end of the trading day. A person can trade a lot by opening a position that will benefit from an increase in price. The investor can also trade short by opening a sell position that would benefit from a decline in price.
The underlying assets for which contracts for difference are available include stocks, entire sectors, currencies, commodities, and global indices. The entry or exit price of contracts for difference is not subject to any restrictions. A position in a contract for difference can be closed at any time during the normal trading day by making a second trade to reverse the original short or long position. The commission is paid both when opening and closing a trade. Other than this, the particular broker may impose terms and conditions that vary from one broker to another.
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