CFD (Contract For Difference)

What are CFDs?

CFDs come from the group of derivatives. They are not based on the price of the underlying, but merely replicate its price movements. A contract for difference thus is not settled via an exchange. CFDs offer the advantage of trading shares, indices, and commodities in either direction even with a small capital investment due to their leverage function.

What is the leverage effect?

The leverage effect can be utilised to increase the return on the capital invested by using leveraged financial products. This is done with the help of borrowed capital, which is used to trade the financial product in question long or short on the market at a fixed ratio, e.g., 1:4:

A capital investment of no more than € 25 is required for a share with a market value of €100 and a leverage of 1:4. This often is a misunderstanding in application of the leverage effect: Beginners are able to trade four times the number of shares on the market with €100. They also quadruple their risk of loss this way, however! In this example, the professional will use the leverage in order to have to invest less capital. Instead of investing €100 for one share, they only require € 25 thanks to the 1:4 leverage.