What is a CFD?
CFD (Contract For Difference) for its acronym in English, is a mechanism by which an investor can participate in a share, index or financial instrument without having to pay the full cost of the instrument. Such transactions are better known as operations at margin, where you just have to contribute with a percentage of the value and collect the total revenue from the increase in the price of that instrument.
But how does it work?
Take for example the well-known Dow Jones index. At the time of writing this example the index is at a price of $ 8.300 dollars per contract. For such reasons we think that this index will increase its value.
In an operation at margin like this one, the investor gives the broker 1% of that value i.e. $ 83 dollars and it already has a contract of Dow Jones worth $ 8.300 dollars.
If the Dow Jones comes at a price of $ 8.700 dollars in a few days, then we can sell our contract that we had taken $ 8.700 dollars at 8.300, with a gain of $ 400 dollars (8.700 to 8.300) this would be more than 400% of profit of our contribution (83 usd), and this contribution is returned to the investor at closing along with the utility (483 usd).
Since we are providing 1% of the value of a title, then for every 1% that the price rises we are doubling the value of what we are providing, so we say we can win 100% in one day, not a supposition, is a fact.
If we think the price will go down instead of up, we can also win the price drop by the same percentage, i.e. we can enter the short.
What is short?
But now we're going to see the fine points of this example, because the money never appears out of nowhere, what is happening is that the broker is lending money to the investor for the total value of the Dow Jones at the time of operation, i.e. by creating the operation, the investor owes the broker $ 8.300 dollars, and nota, he owes money, not the contract because the contract already is from the investor and if the contract goes up to 8.700, it would be the investor's profit and not from the broker.
If this is not clear we're going to take another example:
You know the gold price may increase its price by 3%.
Gold is now worth $ 1,000 dollars.
I'm going to support your project. If you give me 1% of the value of gold as warranty ($ 10 dollars), I buy the gold in your name, and you owe me $ 990 dollars (1,000 - 10).
Gold rises 3%, now worth $ 1.030 dollars.
Then I sell the gold in your name at 1.030. I take the value of debt ($ 990 dollars) and I give you the remaining $ 40 dollars (1.030 -990).
You invest $ 10 and earn $ 30, 300% in one day of operation.
It's like a mortgage, the bank does not give you money to buy a house, the bank buys the house and it keeps it as warranty. BUT you have the house as you like, even selling it more expensive and paying your debt.