CFD stands for "Contract For Difference" in English and "Contract for Difference" in Chinese. It is a relatively new derivative instrument in the financial market. Investors only need to pay a certain amount of margin to the bank or broker according to the agreement to trade. Most CFD transactions cover a variety of financial assets and commodities, including foreign exchange, precious metals, energy, stocks, indices and virtual currencies. In theory, investors can trade all "subjects" through the CFD concept.
In the international financial market, many transactions involve large amounts of money, measured in tens of thousands of dollars, which requires a certain amount of initial capital. Therefore, these transactions are out of reach for ordinary investors (so-called retail investors). In order to facilitate these small investors to enter the financial market, some brokers, traders and liquidity providers have developed a "contract" that provides flexibility and allows transactions to be smaller, such as 1/10 or even 1/1000 units.
The role of brokers and dealers is to provide a platform for small investors to join the market, to bring together small-scale transactions, and then match them with the international financial market. In other words, brokers and dealers provide liquidity like banks to popularize transactions. It should be noted that this trading method does not actually hold the "subject matter", which means that no physical delivery is involved, that is, it is only the difference between the opening of the contract (contract price) and the closing of the contract (settlement price) for cash settlement.
CFDs are mostly traded on margin, which is called leveraged trading. Therefore, investors have a lower initial cost and can use less funds to hold larger positions/position sizes, increasing operational flexibility and expanding returns.
Most CFDs can be traded in a variety of financial products, and can be bullish or bearish, allowing investors to flexibly diversify their operations and hedge other investment portfolios in the financial market.
Most platforms that provide CFD trading also provide 24-hour trading, and generally there is no contract expiration date, providing investors with potentially better entry and exit points.
CFD does not require the actual holding of the commodity assets. It only trades at the price of the "underlying asset". The profit and loss come from the price difference, and investors will not make physical delivery with the counterparty.
CFD transactions usually charge inventory fees (so-called overnight interest) when investors hold positions overnight. If investors hold positions for a long time or incur higher costs, their profits may be eroded.
CFD allows investors to invest in diversified ways (such as stocks , foreign exchange , indices and commodities ) even if they do not have a large amount of capital, and can save the higher handling fees and additional costs such as taxes of other investment channels. It is this advantage that makes the CFD trading model popular among small investors today.
More CFD details: How CFD works, Transaction costs, Full introduction to product types
All financial products traded on margin carry a high degree of risk to your capital. They are not suited to all investors and you can lose more than your initial deposit. Please ensure that you fully understand the risks involved, and seek independent advice if necessary.