What is Contract for Difference?
CFDs are a type of derivative trading that allows one to try and make profits from speculating on the falling and rising prices of the fast moving and dynamic financial markets or products like indices, shares, currencies commodities, and Treasuries.
A CFD can also be described as a leveraged financial product (derivative) since their value is obtained from the value of other assets such as market indices, shares or commodities. When trading CFDs, one takes a position on the variation in the value of the underlying asset over a period.
All the CFD companies allow traders to trade both long (buying) and short (selling) with the expectation that the underlying asset will either increase or decrease in value. In both scenarios, the trader expects to gain the difference between the closing and opening value of the asset being traded.
What is leverage in trading CFDs?
CFDs allow a person to bet on the rising and falling in currencies, shares, and other assets while only committing a small amount of his or her money. The investors only leverage off the sum of money they have in their possession with the hope of making more. With CFDs, an investor can only commit a fraction of the market value of the asset being traded that can be as little as 1%. The CFD provider covers the remainder of the asset which is 99%.
Although you risk only 1% of your investment, you are entitled to the same losses or gains as if you had paid 100%.
The actual percentage to be invested is dictated by the CFD provider and the underlying assets.
This fact makes CFDs more desirable to most investors since even if you do not have enough money to procure the assets, you can share in the expected gains and losses on the value of the asset.
However when trading with leverage, your gains and losses are magnified, and there is a very high chance of losing much more than you put in especially when you over leverage.
What is the best platform for CFD intraday trading?
The recommended platform will always depend on how you trade. For example;
- If your trading is based on algorithms, automation, and technical analysis, then you are advised to use MetaTrader (MT) platform.
- If your orders are placed manually and your trading decisions are made through a separate analytical tool, then it’s advisable to use CMC market front end.
What are the benefits of CFD trading?
There are a number of advantages that come with the trading of CFDs that include;
- Trading on both falling and rising markets
Trading in CFDs allows one to trade the price of an asset going up as well as going down, therefore, letting you benefit from both shorting or selling opportunities as well as buying opportunities. The majority of investors use CFDs as a means of hedging their portfolios through times of short-term volatility.
- Efficient use of capital
One of the main benefits of CFD trading is the use of margin while trading. This use of margin gives you leverage thus enabling one to trade without having to invest the full value of a position. This moves also ensures that all your money isn’t tied up in only one transaction, and therefore it can be used for other investments.
CFDs give traders the opportunity to trade in different markets and in a wide range of instruments like foreign commodities, equities, and indices. The ability of trading across different markets aids traders to diversify their trading portfolio and spread their risks at the same time.
Is it advisable to trade CFDs so as to make bigger profits?
CFDs are generally leveraged derivatives of their underlying assets like commodities or stocks. Therefore, for a small down margin, a trader can have control over a larger position size. However, this condition magnifies not only the profits but equally magnifies the losses thus it must be used cautiously. It is never advisable to risk more money than the sum available in your account since you might get wiped out when a certain move goes against you. Such a scenario will have you owning your broker and hence receiving a margin call.
In short, when trading CFDs, always think of the risk prior to the reward