Contract for difference or CFD trading is a type of financial arrangement that allows a buyer and a seller to structure a sale so that the buyer covenants to remit to the seller the difference between the value of the asset at the time the contract was initiated and the value at the time the transaction is completed. Depending on the exact structure of this arrangement, the seller may be required to pay the difference to the buyer if the asset declines in value between the time that the contract is initiated and when the transaction is approved for completion. CFD trading is legal in a number of countries around the world, while other nations either currently do not have provisions for this type of trading activity or have determined that the practice is not legal within the borders of those nations.
One of the key benefits of CFD trading is that buyers can sometimes find themselves earning a return on a transaction, if the market value of the asset takes a downward turn during the course of the trading activity. In this scenario, the buyer is able to secure the asset at the lower current price, even though the price was higher at the time the contract was first implemented. Assuming that the asset is going through a brief period of decline and is expected to turn around shortly, this positions the buyer to benefit significantly from the outcome of the transaction.
The process of CFD trading can also work to the advantage of the seller. In the event that the value of the asset increases significantly in the period between the launch of the contract and the completion of the transaction, the returns from the sale may be greater than originally envisioned. This situation allows the seller to earn more from the sale and have additional funds on hand that can be invested in other ventures.
As with most financial strategies, the use of CFD trading is not without some degree of risk to both the buyer and the seller. Depending on what happens in the period between the contract time and the date that the contract is settled, the buyer may end up paying significantly more than originally envisioned, or the seller may not make as much money as hoped from the transaction. For this reason, both parties will seek to project the future movement of the asset’s value, determine the chances of crafting a deal that benefits both parties, and then decide if the trade is worth the time and effort.
