CFD as a trader-broker agreement
CFD stands for a contract for difference. The trader and the broker agree to exchange the difference in price of an asset. At the beginning of the contract and at the end of it.
Basically using CFD traders buy or sell assets without actually owning them. Essentially the trader predicts the asset price direction and if the forecast is right the trader earns a profit. If the forecast is wrong. The contract will result in loss for the trader. Note that it is up to the trader to decide when the position should be closed.
Example CFD trade
Let’s take an example. Mario would like to buy 1000 stocks of company A that currently cost 20 dollars each. Forecasting that they will grow in price in the future Mario pays twenty thousand dollars to the broker for 1000 stocks.
After a period of time as Mario predicted the price of stocks increases. Now they cost twenty five dollars so Mario closes the contract and sells the stocks. As Mario’s forecast is correct he receives the price difference in the amount of 5000 dollars from the broker.
But what if Mario’s forecast is wrong and the stocks drop in price? In this case, Mario will have to pay the difference to the broker at the end of the contract.
Also read: CFDs On IQ Option Made Simpler.
We wish you a pleasant trading experience.
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