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My understanding of CFDs is that the profit you make on a CFD is the difference between the price at which you bought the CFD and the price at which you sold your CFD minus various charges/commission.

The idea being that the CFD tracks the underlying and therefore you can speculate on the price of the underlying.

My question is, why does the CFD track the underlying? There is nothing about the CFD that forces it to follow it is there? Or is there?

Edit: To clarify the question... The CFD is priced according to supply and demand The underlying is priced according to supply and demand These two are priced independently. Isn't it possible that they move completely independently of each other?

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  • $\begingroup$ Do you mean what assures you that the CFD contract is indeed going to change exactly as described? $\endgroup$ – SRKX Oct 8 '15 at 8:10
  • $\begingroup$ @SRKX Yeah I think that's what I mean. What assures the buyer that the CFD will move down then the underlying moves down and not just move completely independently. $\endgroup$ – dan Oct 8 '15 at 8:35
  • $\begingroup$ Where did you see CFDs were price according to supply and demand? Do you have a reference source? $\endgroup$ – SRKX Oct 9 '15 at 1:05
  • $\begingroup$ If that's not the case, then how are they priced? $\endgroup$ – dan Oct 9 '15 at 14:07
  • $\begingroup$ Well, as explained in the answers, their price is contractually determined by the CFD broker to be the price of the underlying asset. $\endgroup$ – SRKX Oct 11 '15 at 7:06
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I might be wording this answer incorrectly so if some law expert wants to correct anything, please feel free.

It is my understanding that CFD are contracts you pass with your CFD broker. So, this contract has a value as long as your broker exists and hasn't decided not to pay you. So, in a sense, the price is just set by the agreement between you and him.

Say the broker defaults, you won't have any claim on the underlying, and you won't be able to get anything out of you're winning positions (except, of course, claiming you're owed your gains if the broker goes into liquidation and waiting to see if you get something after all legal procedures are over... i.e you won't get anything).

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  • $\begingroup$ I've added a clarification to the question $\endgroup$ – dan Oct 8 '15 at 10:14
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When you enter a position with CFD, you're buying it from the CFD provider. And you can only sell it back to the CFD provider for the value of the underlying. So if AAPL is trading at \$100, you can only sell the CFD back to broker for \$100. If you're a CFD buyer, why would you buy the contract for more than \$100. If you're a CFD seller, why would you sell it for less than \$100? If the price of CFD is different from the price of underlying, there's arbitrage opportunity.

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  • $\begingroup$ Actually, you could have a CFD where price is different the price of the underlying asset (say price + 1 dollar for example) without having an arbitrage opportunity because CFDs don't give you any claim on the asset and you can only trade with the same broker. $\endgroup$ – SRKX Oct 10 '15 at 4:46

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