Explanation about CFD Trading You Should Know

There are a lot of types of trading that seems appealing because it can give high profits easily. One of them is CFD trading. What is CFD trading? Is it halal or haram? In today’s article, we will talk about CFD trading since it offers you easiness to get profit. As Muslims, we have to understand the whole process to avoid unlawful activities.

What is CFD?

CFD stands for Contract for Difference. It is a contract between two parties, a buyer and a seller. The process of this contract is like a guessing game. Both parties will guess the asset’s price movement. Let’s say the buyer guesses that the asset’s price will increase, and the seller says that the asset’s price will decrease. In this kind of scenario if the buyer is right, then the seller should pay the difference between the asset’s current price and the asset’s price when the contract was made.

Let’s make it clear, for example:

1. The buyer says that the price will increase. The asset’s current price is $500 and it turns out to be $530 when the contract is settled. The buyer is right. So, the seller should pay $30 to the buyer.

2. On the other hand, the seller says that the price will decrease. If the price becomes $470 at contract settlement time, the seller is right. The buyer should pay $30 to the seller.

Contracts for Difference (CFDs) are appealing because they allow a trader to have access to the price movements of an underlying asset without having to pay the entire price of the item.

How can we ‘own’ stock without having to pay the full price? This is because of leverage.

What is leverage?

Leverage the amount of money paid for the guarantee based on the margin rate.

For example, stock ABC is trading at $500. The margin rate of CFDs on ABC stock is 10%. This means you only have to pay $50 to access the price movement of ABC stock. You can do CFD trading by only paying $50, whereas you have to pay $500 to do regular trading.

Halal or Haram?

Firstly, let’s begin with analyzing the risk. If we buy a real stock, we bear the real risk. Meanwhile, through CFDs, there is no ‘real risk’ because it did not exist beforehand. In Islam, there must be a clear justification for every creation of risk. What is the justification for the creation of risk through CFDs? There is none. Besides, money is made when someone else lost his money.

Secondly, it is clear that this kind of activity is prohibited in Islam. Doing CFD trading to gain profit is maysir because it creates risk in order to benefit without any value.

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