CFD Terminology - Understanding Contracts for Difference

There is lots of different terminology that a trader of contracts for difference must understand if they are going to get their head around all the information out there in the contracts for different world.

Whether you are looking for a broker, developing trading strategies, or self educating, understanding the terminology (just like in lots of other disciplines) is the first step.

Here is some of the common terminology that is used in the contract for difference world:

Blue chip stock: A company that is regarded as traditional and not technical. Large, profitable and conservatively managed organizations. Well established company.

Contract for difference: Contract for difference. A contract between two parties, buyer and seller, stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time. An over the counter derivative similar to a future, in that CFDs are liquid derivative instruments that mirror the underlying assets in all aspects, and can therefore be traded by closing out and re-opening at any time before the expiry date, at the prevailing market rate. CFDs reduce traders capital investment amount required, while increasing profit potential. See CFD Overview for a detailed description.

Gearing: Also known as leverage. The ratio of a company's long-term funds with fixed interest to its total capital. A high gearing is *generally considered very speculative.

Hedging: The practice of undertaking one investment activity in order to protect against loss in another, e.g. selling short to nullify a previous purchase, or buying long to offset a previous short sale. While hedges reduce potential losses, they also tend to reduce potential profits.

Limit orders: Instructions do deal that stipulate the minimum or maximum price at which you want to buy or sell your shares.

Short: 'Short selling' or a 'short position' is placing a trade if a trader thinks the market price will fall. Originally from thee act of selling a security that is not owned and hence, creating a short position. An investor who goes short borrows the security from their broker to sell and then rebuys the security at a later date and a lower price. The difference is the investor's profit.

Over the Counter: Over the Counter (OTC) represents a market in which security transactions are conducted through a telephone and computer network-connecting dealers in stocks and bonds, rather than on the floor of an Exchange.

Synthetic Market: A Synthetic Market is a market created by your CFD Broker. Prices are guided by the underlying assets but the spread can be slightly different (as per the pricing policies of your broker). In a Synthetic market, all transactions happen between the CFD broker and the Trader.

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