What is a CFD?

CFD stands for 'contract for difference' and consists of an agreement (contract) to exchange the difference in the value of an underlying (currency pair, commodity, index, crypto, share) between the time at which the contract is opened and the time at which it is closed. If the difference is negative, then the buyer must pay the difference to the seller. If the difference is positive, then the seller must pay the difference to the buyer. When trading CFDs traders buy (go long) when they are expecting a rise and sell (go short) when expecting a drop in value. The CFD derivatives market is not standardised and is made up of buyers and sellers who trade OTC ‘over the counter’ (not on any regulated exchange), meaning that the broker is the counterparty to every transaction and there is therefore counterparty risk.