“Contract for difference,” or “CFD,” refers to an agreement (contract) to exchange the difference in value of an underlying asset between the times the contract is opened and closed. If the difference is negative, the buyer is required to pay the seller the difference. If the difference is positive, the seller is required to provide the buyer the difference. When trading CFDs, investors purchase (go long) when they anticipate an increase in value and sell (go short) when they anticipate a decline.

As an example: if you buy a ‘CFD’ at $100 and sell at $120 then you will receive the $20 difference. If you buy a ‘CFD’ at $100 and sell at $80 then you pay the $20 difference.

In essence, a CFD contract means that you are not physically purchasing the underlying asset (currency pair, commodity, share, index, crypto), but rather, you are exposed to the underlying instrument’s price movement through the CFD.