CFD – What are they?

CFDs, the best-known derivative products

CFDs are a type of financial derivative product, such as futures, options, etc. In which the investor and the Broker agree to exchange the difference between the buying and selling prices of an underlying asset. CFDs are products that can be bought and sold, like stocks, within its own market. In this way we can take advantage of the potential of a short operation in case we find ourselves before a downtrend. Of course, there is money to be made trading with them. And a lot.

When a trader wants to trade short, he can only do it through CFDs since they do not have any type of restriction. Short trading in stocks is not always allowed and is often restricted as it is purely speculative trading where we “bet” that the price will follow a downtrend. In Spain, for example, the CNMV has prohibited short operations for certain periods of time.

Leverage with CFDs

Like all financial derivatives, the CFDs let you leverage, use it or not is up to the investor. This means that, in order to open a position, be it buy or sell, the broker will only ask you for a deposit, usually a percentage of the total position. This percentage is called guarantee.

Being leveraged products, we must be aware that if the position goes against us, we can lose more than the deposit that the Broker has demanded.. Hence the tremendous importance of operating based on the monetary management that we have previously set in our trading plan. This is a fundamental learning that you will learn in our courses.

The regulation of CFDs

CFDs are a contract that is signed between two parties, the trader and the Broker, listed on OTC markets. Unlike in the Futures market, in CFDs there is no authority that directly controls the operations. This is an advantage for the issue of commissions, since all the costs of the Exchange and expenses associated with the control are eliminated, but we also fall into a dark zone, in which no regulator can intervene.
Although the use of CFDs is regulated by the financial authorities, in the case of Europe the ESMA, they do not really intervene in the operations.

At the beginning of August 2022, the new ESMA regulation for the protection of the retail client came into force. ESMA considers that retail clients do not have sufficient knowledge and experience to trade instruments such as CFDs.

Sounds interesting to you, right? Keep learning with DTP with upcoming articles on our Blog.

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