What is a primary characteristic of contracts for difference (CFDs)?

Contracts for difference (CFDs) are financial derivatives that allow traders to speculate on the price movements of assets without actually owning the underlying asset. The primary characteristic of CFDs is that they enable traders to settle price differences between the opening and closing of a trade. When entering into a CFD, the trader agrees to exchange the difference in the value of the asset from the point at which the contract is opened to when it is closed. This means that traders can benefit from price fluctuations, whether the asset's price is rising or falling.

Understanding this characteristic is crucial, as it highlights the appeal of CFDs as a flexible trading tool. They provide opportunities for leverage and do not necessitate the physical ownership of the asset, which allows traders to gain exposure to various markets without the complexities of holding the actual assets.

In contrast, having a set maturity date, requiring the holding of the underlying asset, or being restricted to local markets does not reflect the true nature of CFDs, as they are designed specifically for ease of trading and flexibility in market engagement. This is what makes CFDs suitable for a range of traders looking to capitalize on short-term price movements.