CFDs for Beginners. Part 1

CFDs. What are

The letters correspond to CFD Contracts For Difference English acronym, Contracts for Difference in Castilian. As its name indicates a CFD is a contract that is exchanged price difference of an instrument in the market between the time when the contract is agreed until it closes.

If we think of a CFD on shares, for example, what is exchanged by CFD (by contract) is the difference in share price since the CFD opens until it closes.

Therefore, CFDs are derivatives because they derive the price of another asset.

The contract is based on an agreement between two parties, usually an investor and a provider. Currently in Spain several banks offer CFDs although there are completely specialized companies offering Contracts for Difference.

Why trade CFDs with

It is natural to ask: Why not buy directly from the actions (or any other asset) instead of the CFD? The answer is simple: with the CFD is paid less because the investor has never physically active, has a contract only on its price. Let's see.

CFDs are leveraged products. This means that operating them puts an initial contribution by way of guarantee, which is called margin. As the investor does not own the asset, the margin only represents a percentage of total value thereof.

Much of the theory of CFDs may seem confusing, but in practice it is much simpler than it seems.

Imagine an investor want to trade CFDs on shares. To start the operation the investor will have to put a margin that will be a percentage of the total value of shares multiplied by the number of contracts (CFDs) that wish to purchase. However, if the investor acquires the shares without CFDs, would have to pay the full value.

This is a huge advantage over traditional trading where you have to pay the total assets.

Another advantage over traditional trading is that you can invest with CFDs in bull markets, ie when the instrument on which it operates would increase in value in the market. And in bear markets, when operating on an instrument that is devalorando.

Both trends are possible with CFD trades. So now, when the economy is going through a good situation worldwide, many investors opt for CFDs in bear markets.

Go short or long. How the CFD

In financial jargon 'go long' means 'buy' and 'go short' means 'sell'. The modus operandi of the CFD is simple: 'buy' (or go long) when it is believed that an asset price increase market while 'sell' (go short) when an asset is expected to be devalued in the market.

If the investor knows a company knows that the path it has been positive for a certain period and expects the company's winning streak continues, the investor will purchase CFDs on shares of that company. While you have a totally opposite impression, the investor can continue to use CFDs, but in this market by selling the shares of that company.

In the next article

For the novice understand what is explained in this article, part 2 pass from theory to action seeing a practical example.

The above comments do not constitute investment advice and IG Markets therefore accepts no responsibility for any use that may be made of them. CFDs are a leveraged product and carries a high level of risk. CFDs may not be suitable for anyone, make sure you completely understand the risk involved and make a constant monitoring of your investment.