CFD – CFDs (or contracts for difference) are derivative instruments through which the counter parties exchange the value differences of an underlying data between two different moments, that of opening the position and that of the its closing.
Like any derivative contract, the CFD also has an underlying instrument, ie the replicated financial asset.
That can be, for example, an action, a cross currency, a cryptocurrency, an index or a bond.
In other words, CFDs focus on the performance of an instrument (the underlying) without having effective control over it.
For example, with CFDs on the dollar, you take a position on the US currency without actually owning it.
Same thing with the CFD on Amazon stock, bitcoin or Nasdaq.
CFDs are products that use financial leverage.
The investor who decides to exploit it has the possibility to buy or sell financial assets for an amount greater than the capital held. Part of the money is then used by the investor, while the rest is guaranteed by the broker.
In a leveraged operation 1:10, for example, the investor will use 1,000 euros to take a position on the underlying for a total value of 10,000 euros.
In this way the subject will be able to benefit from a higher return in the event of a favorable transaction.
Vice versa to suffer a substantial loss (even of all the capital) in the event of an unfavorable trend.
In the case of the example, if the underlying were to lose 10% of its value, it would be reset. Should the investor increase by 10%, he would have doubled his investment.