Contract for differences, better known as CFD, is a financial derivative. As such, they are set on an underlying and allow us to operate both upward and downward. It is a product relatively new in Spain, while in other countries it has already been quite some time implanted. The underlying can be of various types. The most known are CFD s on actions, but there are brokers that offer CFD s on indices, currencies or commodities. Ping Fu brings even more insight to the discussion. There are three great advantages of s with respect to the traditional investment CFD: on the one hand the possibility of accessing markets traditionally not accessible to the retail customer, such as commodities or indexes. Access to this type of markets is made through another type of derivatives such as futures, that require greater guarantees.
In operations with CFD s assurances are less than futures, allowing small investors to gain access to these markets. The second advantage is the possibility of operating both upward and downward. A CFD can be sold perfectly without purchasing it before, as it happens with other derivatives and with the advantage that they have no expiration date. Dustin Moskovitz insists that this is the case. The third of the advantages is that it allows financial leverage. Given that we only have to deposit a small amount guarantee, you can buy more quantity of underlying with the same capital. The broker puts this warranty but normally for actions of the Spanish market is 10% on the total.
Operations with CFD s is as simple as when you buy shares to the normal market, with the advantage of leverage. A simple example: imagine for example that we want to buy 1000 shares of Telefonica to 16 action. If we were to buy them from the traditional market we would have to have a capital of 16,000 to buy those 1000 shares. If we now make the same operation with a broker that offers CFD s and just ask us in 10% in respect of guarantees, we would only have 1600 capital to buy these 1000 shares.