CFD or Contract for difference is an agreement between two parties, buyer and seller. The value of the contract is based on the underlying asset (for example, index, stock or commodity future). Upon the contract expiration or when the parties make a decision to close the position, the seller pays the buyer the difference between the current value of the asset and its opening value, if the value of the underlying asset has increased and, vice versa, if the value of the underlying asset has decreased, and the difference between the current and initial value of the contract is negative - the buyer pays it to the seller.
CFD are derivative financial instruments by their nature that provide traders with an opportunity to make profit on price movements of various assets, allowing opening long positions when the asset prices go up and short positions, when the prices go down. The CFD value linked to the underlying asset moves in the same direction as the price of the underlying asset and depends on the same factors. At the same time being much more flexible and accessible, contracts for difference present a number of advantages compared to trading the underlying asset directly.
If you are still asking “What is CFD trading?” it is worth to bring an example that will help you to imagine it in practice. Let the initial price of Apple stocks is $100. You conclude (buy) a CFD contract for 1000 Apple stocks. If the price then goes up to $105, the sum of the difference, paid to the buyer by the seller will equal to $5,000. And vice versa, if the price falls to $95, the seller will get the price difference from the buyer equal to $5,000. The contract does not imply physical ownership and purchase/sale of the underlying stocks that enables investors to avoid the registration of the ownership rights for the assets and the associated transaction costs.