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The Forex Edge by James Dicks

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CHAPTER 4CONTRACTS FOR DIFFERENCE 101

Contracts for difference, or CFDs, have been used for more than 20 years, but they did not become popular with retail traders until the last decade. Essentially, a CFD is a derivative—its value is based on the performance of an underlying financial instrument, such as stocks, mutual funds, bonds, commodities, currencies, and market indexes—used to speculate on the future value of an asset by taking either a long or short position.

The investor, or “buyer,” and CFD provider, or “seller,” agree to pay the difference between the current asset price and its value on the contract date. For a long position, the seller would pay the difference to the buyer if the asset price rises, and the buyer pays if the asset ...

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