A CFD trading platform is a broker's app or website on which traders bet on whether a price will go up or down, without owning the asset. CFD stands for contract for difference. The asset can be a share, a stock market index, gold or a currency.
Here is how a CFD works. The trader and the broker agree a contract on the price of an asset. When the trader closes the contract, one side pays the other the difference between the opening price and the closing price. Nobody buys or sells the asset itself.
Consider a trader in London who thinks that the price of gold will rise. Gold costs $4,000 an ounce. She opens a CFD on 10 ounces. She does not buy any gold. The price rises to $4,050, and she closes the contract. The broker pays her 10 × $50 = $500. If the price had fallen to $3,950, she would have paid the broker $500.
She did not need $40,000 to open this position. She needed only a deposit called margin, for example 5%, which is $2,000. This is called leverage. With leverage, a small price movement causes a large profit or a large loss compared with the deposit. Regulators in Britain and Europe require CFD brokers to publish what share of their retail clients lose money. In most published figures, a majority of clients lose.
The platform does several jobs. It shows live prices, which it takes from market data feeds, the same data that appears on a financial data terminal. It accepts the trader's deposit through a payment gateway. It runs a risk engine that closes a trader's positions automatically when the money in the account falls to half of the required margin, as British and European rules require.
CFDs are not permitted for Indian residents. The RBI publishes an alert list of unauthorised forex trading platforms that advertise to Indians. Indian traders who want to bet on price movements use futures and options (F&O) through a stock trading app instead. That is the main difference between the two. F&O contracts are traded on an exchange, and a clearing house guarantees both sides. A CFD is a private contract with the broker, and the broker itself is usually on the other side of the bet.