Today, Internet-assisted trading engages 15+ million people across the world. Digital platforms connect them to global markets where gigantic amounts of money circulate between institutions and individuals. Aside from currency pairs as the basis for Forex trading, brokers provide a number of other tools. One of these is CFD or Contract for Difference.
New Generation of Financial Tools
The instrument allows you to speculate on the price for a physical asset that you do not own. This is drastically different from the old-school stock exchange. There, players purchase shares issued by businesses, which allows the latter to attract investor capital. Shareholders gain ownership of a percentage of the corporation and become entitled to dividends. Shares may be subsequently sold off for profit.
The modern economy is increasingly digitized. We are used to getting services on the go. Via smartphones, humans do their shopping, complete work tasks, and check their bank accounts. Trading has also gone digital. Whether through desktop or mobile platforms, you may trade instruments that are entirely virtual. Such are CFDs, and these contracts can bring real money.
A Contract for Difference is, as the name suggests, a form of agreement between a seller and a buyer. The subject is price change for a certain instrument. CFDs are used for commodities, currencies, market indices, and cryptocurrencies. Whatever the instrument, the logic of trading CFDs is unchanged: speculation is based on prices with no ownership required or involved.
CFDs on Commodities
Commodities are goods the price of which is set regardless of the producer. These include crude oil, wheat, precious metals, and the like. For example, the price of Brent oil is identical for all companies supplying the brand. With CFDs, you do not need to purchase any physical resources. All profit is based on price movements.
Generally, the instrument may be defined as a derivative product that allows traders to profit from the speculation on commodity prices. Thanks to leverage, you may use a portion of your broker’s capital to boost returns. The required deposit is called ‘margin’.
Both upward and downward trends can prove profitable. For example, if you expect the value to drop, you may capitalize on this by opening a ‘Sell’ position. This way, you will sell the CFDs while their price is still high and buy more of the same Instrument later for less.
CFDs on Indices
Indices like FTSE 100 are a benchmark of market performance overall. The value may rise or fall, which is another source of profit for speculators. For instance, if you expect the FTSE 100 to perform well, you can invest in the respective CFD.
The key advantage of trading separate shares is the clustered nature of the tool. The value of such CFD is based on the performance of a number of firms. Moreover, big indices are often tied to the most reliable blue-chip baskets. In addition, the value of this CFD is unlikely to ever hit zero as it reflects the sum of stocks.
CFDs on Cryptocurrencies
Here, CFDs are linked to digital coins. The four most popular types today are Bitcoin, Ethereum, Litecoin, and Ripple. Click here to read the Ultimate Guide to CFD Trading from Cryptimi. CFDs are priced against the US dollar. Actual sales of crypto money are associated with all kinds of scams. As you do not own any crypto, this finance instrument ensures the security of your investment and protection against fraud.
Here, like with any CFD, profit is based on price speculation. Any movements of the market may work to your advantage. Abrupt soaring of the Bitcoin value was a global sensation a few years ago. Crypto money maintains its appeal due to the decentralized, public ledger blockchain scheme.
Benefits of CFDs
Contact your broker for exact conditions of expanding your investment portfolio with CFDs. This is a great way to diversify and reduce overall risks. If you trade on margin, returns are boosted thanks to leverage.
The more instruments you engage, the less damage is caused by losses in any area. For example, if currency pairs underperform, simultaneous gains from trading of Contracts for Difference may compensate for the unprofitable positions.
Interesting related article: “What is a Broker?“