One of the most popular trading methods is CFD trading, or contracts for difference. A trader can bet on the price movements of instruments such as stocks, forex and commodities using a small fraction of the trade value, which is known as trading with margin or leverage.
Most transactions are carried out using a CFD trading account, where you can find necessary tools. The ability to use this financial derivative is an important skill for any short-term trader, and this applies to both beginners and more experienced traders.
Features of CFD trading
With this type of trading, you can use funds that greatly exceed your available budget. It is enough to make a deposit in the amount set by the broker. The rest can be provided to you in the form of borrowed funds.
CFD trading involves working with a wide range of assets. These include currency pairs, securities, raw materials and much more. For a successful strategy, some traders choose to diversify their investment portfolios in order to reduce losses in the event of a crisis.
The benefits of CFDs include the following:
- selection from a large number of assets;
- use of leverage;
- possibility of risk hedging.
When trading CFDs, profit can be made from an increase or decrease in the value of an asset. In doing so, you must be convinced of the correct movement of the entire market.
If the asset should rise, you could place a buy order (long position). If a decrease in value is expected, you could open a short position – or sell order. The further behavior of the market will determine what your outcome will be. You will earn or incur losses expressed in certain amounts of money.
The longer this growth takes place, the higher your profit will be. The reverse situation will also affect losses. If you want to play on the fall of the market, your profit will increase when the price declines.
How to trade with such contracts
If you use leverage or margin, you may lose more than your deposit. Therefore, it is very important to use a competent approach when the degree of risk is increased.
Some traders choose to follow this method: when the market grows, buy at the offer price or higher, when it falls, sell at the original price or lower. Each trader decides for himself how many assets he will have. The main thing is to comply with the requirements provided for a particular market and adhere to a competent strategy.
Most CFDs do not have a specific expiration date. You simply close the position when you deem it appropriate. For example, you open a CFD contract to buy 50 shares of a prospective growing company, expecting good payouts. However, the picture begins to unfold in a different scenario. The stock price falls and you risk losing too much. In this scenario, it is better to close the position and minimize losses.
Another scenario is also possible. The value of the company’s shares is increasing, and you are bullish. But you foresee that the price of assets will soon begin to decline, so you prefer to hit the existing jackpot. By closing the position, you may make a profit, so you set the terms of the contracts yourself.
However, there are exceptions to this rule. Brokers can offer contracts with specific expiration dates, known as futures or forwards. Such situations sometimes occur in the commodities market. In this case, you also have certain freedom of action. You do not need to wait for the expiration of the contract to close a position. It allows you to trade in any period within this time frame.
What’s the use?
Not being the direct owner of the asset, you can still get access to the market. The list of markets for trading on the price difference is huge. At the same time, you decide where exactly to trade. In CFD transactions, a trader can benefit from both market growth and decline.
CFDs are used for short-term trades. In this case, you do not need a large initial investment. You can enter into CFD contracts around the clock. A trader gets access to such opportunities with the help of brokers. With CMC Markets, you can trade even when the main market is closed (for certain assets). As a result, you can open and close the desired positions at any time of the day.
Another distinguishing feature is speed. However, it depends on the specific conditions that your broker offers. On a quality platform, real prices are always indicated. There are special systems through which your transactions are carried out automatically.
An important aspect is also the provision of borrowed funds. It allows you to trade with a small part of the capital. As a result, it becomes possible to spend your own funds on CFDs with multiple assets. Therefore, it is possible to allocate capital to different contracts.
What are the disadvantages of these contracts?
The first is the fact that the person does not own the asset. There is also a strong dependence on the intermediary. However, these nuances are due to the specifics of CFD trading. The performance of speculative actions could turn into a tool for making money. Therefore, the lack of ownership of the asset may no longer perceived as a problem.
It is extremely important to cooperate with a broker that will fulfill its obligations. Do not forget about the big losses that are possible with unsuccessful contracts using leverage.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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