What in the World Is a CFD?
If you are new to the world of trading and interested to know more, you might have come across the term Contracts for Difference, or CFD. There are many brokers that offer these contracts. In this article, you will get to know brief but complete basics about CFD trading.
Contracts for Difference (CFDs) Explained
CFD is a tool for trading which stands for contracts for difference. A trader profits or loses money using CFD when the price of the asset fluctuates. The profit or loss is the difference between the opening and closing price of an asset. However, the trader doesn’t need to actually own the asset he or she will trade and this is the essence of a CFD, as it is just a contract on the price difference of the underlying instrument.
For this type of trading, traders can use the leveraging mechanism. The traders can trade with more money than they actually deposit. So, if the trading is successful, the traders will get the highest profit. In the same way, for unsuccessful trading, there is a considerable risk of losing money. You can learn more about CFD trading at TradingGator.com.
CFD Trading — Advantages
There are numerous advantages trading CFDs. Few of them are highlighted below-
1) Higher Leverage
One of the primary reasons why people go for CFD trading is the high leverage opportunity. CFD traders offer higher leverage options than traditional trading. However, this has both positive and negative effects on trading. Now the CFD market is actually highly regulated, and traders can obtain leverage from a 2% to 50% rate, or even higher leverage. With the lower margin, one can get the highest possible return. But the increased leverage comes with higher risk and may lead to significant losses. So, the traders need to be careful while trading on margin.
2) Access to Global Markets
Traders can access to the worldwide markets through this product. CFD brokers offer world-wide access in the leading markets all around the globe.
3) Shorting
Where many markets have rules for stopping shorting, CFD instruments can be shorted easily as the traders don’t need to own the assets. A shot position in a CFD is actually just as easy to establish as a trade on the long-side.
4) Various Opportunities
You can get a variety of opportunities for trading the markets with CFDs. One can trade with stock, index, currency, commodity, and other commodities with the CFD trading option.
So, these are some significant benefits to CFD trading. If haven’t grasped the concept of Contracts for Difference yet, please read the following example.
Example of CFD trading
Suppose you want to trade a CFD, going to an extended position. While opening a position, you will either buy or sell. The profit or loss is determined by the price movement of the underlying product in the marketplace.
For example, you want to buy shares of Company A and estimate its value would be increasing. So, to make a profit from this price appreciation, you want to open a long position. You purchase 100 shares with a value of $150 each. So, the total amount of your trading would be $15,000. If the price appreciates to $160, you can make $10 profit per share. And the profit amounts to a total of $1,000 ($10 x 100 shares).
As you have got a basic idea about CFD trading, you can now start trading in the market and make maximum profit from it.