Contract for difference (CFD) is a type of financial instrument that allows one party to speculate on the price movement of an asset without owning it. CFDs are typically traded through brokers, who act as the counterparty in the transaction and take opposing positions with their customers.
The word contract comes from the agreement between parties to settle at some point by paying each other what has happened to be worth then.
Number #1: The first one is the risk of expiry. Even though contract for difference are derivatives, not options, they work similarly and follow an expiration date just like options do.
This means that if you don’t close your position before the contract expires, it will automatically be closed by your broker at market price, after which you’ll either get or lose money depending on how much it differs from where you bought/sold.
Number #2: The second precaution is taxation – since these products are very popular among traders, they’re heavily taxed in most countries! That’s why knowing what taxes apply to CFD trading can save quite some cash when doing business with them.
For example, US citizens must pay withholding tax on dividends earned through foreign brokers, while European Union residents must declare any profits made within the Union.