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Types of Investments

Contract for Differences (CFD)

KEY TAKEAWAYS
-A contract for differences (CFD) is a financial contract that pays the differences in the settlement price between the open and closing trades.
-CFDs essentially allow investors to trade the direction of securities over the very short-term and are especially popular in FX and commodities products.
-CFDs are cash-settled but usually allow ample margin trading so that investors need only put up a small amount of the contract’s notional payoff.

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Pros


-CFDs allow investors to trade the price movement of assets including ETFs, stock indices, and commodity futures.
-CFDs provide investors with all of the benefits and risks of owning a security without actually owning it.
- CFDs use leverage allowing investors to put up a small percentage of the trade amount with a broker.
- CFDs allow investors to easily take a long or short position or a buy and sell position.

Cons


-Although leverage can amplify gains with CFDs, leverage can also magnify losses.
-Extreme price volatility or fluctuations can lead to wide spreads between the bid (buy) and ask (sell) prices from a broker.
- The CFD industry is not highly regulated, not allowed in the U.S., and traders are reliant on a broker’s credibility and reputation.
- Investors holding a losing position can get a margin call from their broker requiring the deposit of additional funds.

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