Financial instruments are contracts between individuals or parties that can be created, traded, and settled. They hold monetary value in two main ways: they can be cash instruments or derivative instruments.

Cash instruments include deposits and loans. Derivative instruments are more complex, and they derive their value based on the performance of an underlying asset, multiple assets, or a benchmark. Derivatives are thus priced based on fluctuations of these assets and benchmarks in financial markets. They can be traded on exchanges with publicly visible prices, or they can be traded over-the-counter (OTC) directly between two parties without the need for financial intermediaries or public listings.

A CFD account enables traders to participate in CFD trading. CFD stands for ‘Contract for Difference’ and it is a derivative product that allows traders to speculate on assets based on their underlying price movements on the market. Traders do not own the underlying asset when they trade CFDs, and your main payment for CFD trading is the spread. CFDs are leveraged, requiring an initial deposit called a margin.

When you trade CFDs online, you essentially are speculating on the difference in the price of an underlying asset from the point the contract is opened, until it is closed. CFD traders can speculate on movements in either direction, meaning there are opportunities to both go long or short the asset.

You can trade CFDs through accessing CFD markets across a range of underlying assets. If you believe the market price of an asset will appreciate, you can buy or ‘go long’, and open a CFD position that will profit as the asset increases in price. Conversely, if you believe the market price of an asset will depreciate, you can sell or ‘go short’, and open a CFD position that will profit as the asset drops in price. Alchemy Markets is a licensed multi-asset CFD broker and you can trade your favourite CFDs on our MT5 platform with a live account.

CFD trading is leveraged, which means you can gain access to larger exposure on the CFD market with a fraction of the capital required for the full position. Leverage can be expressed in ratios. A leverage of 50:1 means that for every $10 a trader puts down, they will be able to open a position 50 times its size, or $500, on the CFD trading platform.**

In leveraged trading, the deposit a trader puts down in their CFD account is known as a margin. Typically, their broker or provider loans them the rest of the money to open the position. Leverage can make a trader’s capital go further, but it can also expose their portfolio to greater risk as profits and losses from small price movements in markets will be magnified.

**At Alchemy Markets, leverage for CFDs varies depending on the asset traded. For more information, you can refer to specific instrument pages.

Profits from CFD trading online are generally not exempt from being taxed as capital income. However, as CFDs are derivative products and traders do not take ownership of the underlying asset when trading, they are sometimes exempt from stamp duty. Taxation policies regarding CFDs vary around the world, and traders should ensure they understand how they are taxed in their jurisdiction and speak to a tax professional.

An Index CFD is a derivative that speculates on the price movement of the index that is being tracked, and CFD traders do not take ownership of the underlying asset. An Index ETF, on the other hand, is a fund that invests in the basket of stocks tracked by an Index. With an ETF, traders own part of a fund that itself owns the underlying shares.