A CFD is an agreement between a buyer and seller to exchange the difference in value of the contract, between when the contract is opened and when it is closed. The difference is determined by reference to any underlying instrument as mentioned above (shares, indices, commodities and currencies). CFDs are a leveraged product that provide uncapped potential for profits and also losses. They are easier to understand than any other derivatives, and provide the flexibility to take advantage of a falling market, as well as a rising one.
The seller is one of 16 Australian CFD providers. The buyer of a CFD is anyone who has a strong understanding of finance markets. This can be retail clients, institutional investors, hedge funds, day traders or mum-and-dad-style investors. Trading in CFD’s is not for the inexperienced.
An example of how CFD’s work is the illustrated by the purchase of a CFD on selected shares. The buyer dictates the price at which he intends to purchase and the seller in turn does the same, with the selling price based on the movement of the underlying asset in the market (in case of Direct Market Access) or set by the provider (in case of Market Maker). If the price of the underlying asset or shares falls below the expected price, the buyer purchases the asset at a loss, while the seller makes the profit. The reverse applies if the asset value moves in the opposite direction.