CFD, short for Contracts for Difference, is a contract between two parties who speculate on the price of an underlying asset. Compared to other traditional forms of investment opportunities, CFD trading has big winning chances but also great risks should you learn how to trade CFD.
When answering the question, What is CFD trading, it is important to know that CFD trading is always conducted through a broker where you are the buyer and the broker is the seller. Nothing is done in person and everything is always done online through a trading platform. It is as easy to understand as it sounds.
Not all brokers offer CFDs, but those who do usually offer CFDs on all the assets they normally offer. When trading CFD, it is important to look for the right broker especially one who sells stocks and currencies making CFD trading since you can buy the CFDs on the right currency and equity markets.
CFD trading was invented in the 1990s at UBS in London and began with the exclusion of HF. One of the reasons for CFD’s emergence was that speculative investments were tax-free in London at the time.
To begin with, CFD trading was simply a way to earn tax-free money on the London Stock Exchange and to even out losses by speculating on your own investments. CFD has since continued to be a popular form of trade.
How Does CFD Trading Work?
CFDs are legally binding contracts between two parties and in this case between you and a broker. The contract stipulates that the seller (broker) must pay the buyer (you) the difference between the bid and ask price. Should the difference be negative, i.e. the price of the underlying asset has fallen, it is the buyer who pays the seller. It is important that you understand that should the price of the underlying asset to fall below your purchase price then you will owe the broker money. If the price rises instead, the broker is the one who owes you money and payment to your trading account is made. That is how the CFD trading works.
CFD trading favors you. These contracts are time-based but usually not time-limited. That means you can choose when you want to sell a contract. Because you are in control, you can also wait for a downward trend turn in a bid to secure a win.
You can buy CFDs on all financial markets in the stocks with indices and currencies being the most common. As a rule, CFD trading tends to be used for long-term investment, taking advantage of upward price trends. There is also the option of buying CFDs for short and downward trends (“go short”), although it is much less common.
Leverage And Margin
A unique factor of CFD trading is that all CFDs automatically come with a so-called leverage. This means that as a bidder only pays a fraction of the underlying asset’s actual price.
The interesting levers in CFD trading are a safety requirement.
There are big profit opportunities for those who know how to best utilize CFD trading. On the other hand, it also comes with more risk and you can get into a situation where you lose money you never had or can not afford to lose.
Because of this additional risk, several countries tried to put an end to CFD trading. As this is being written, CFDs are available and legal in most of Europe, but in many places like Asia, Africa and Latin America, it is prohibited. CFDs are also not legal in the US, which is good to know. That it means is that you may not buy or sell CFD’s in the United States even if you are only there on holiday.
Advantages And Disadvantages Of CFDs
As with all forms of investments, CFD trading has both advantages and disadvantages. In fact, no form of trading is risk-free or perfect so it’s always up to you to decide if the advantages outweigh the disadvantages. But that said, the CFDs are an extremely popular form of trading and something you definitely should try. We generally recommend testing of nearly all types of day trading available, mainly to gain experience. Here are some benefits of trade form, just so you have an eye on what you’re getting in to.
- You can buy CFDs in all markets and therefore do not limit to a market
- CFDs offer faster and greater chances of making a profit than other forms of trading, including equities and indices. Also, you do not invest equal amounts
- CFDs are usually free of charge and hold to their positions. In short, you will not have to pay interest
- It is relatively easy to learn trading CFDs. Having knowledge of a particular market can maximize their opportunities by combining their usual trading CFDs
Cons (and how to tackle them)
- The main disadvantage of CFD trading is the increased risk as leverage contributes. But do not let that scare you. If you make sure to educate yourself on the market and the tools you use, you can minimize the risk
- Not all brokers offer CFDs. If it happens that your broker does not offer them, you can open a trading account with another broker. There is certainly nothing wrong with having multiple accounts
- If you choose to hold positions for long periods, most brokers will charge interest on the amount you invested. In some cases, the interest rate can be as high as 3%
Brokers CFD Trading
Today, almost all leading brokers offer some kind of CFD trading. If you are already engaged in trading and have found a broker that you like, you can easily switch to trade CFDs. If you are new to the investment world, you must first start by looking for a broker that you feel comfortable with.
The most important thing when choosing brokers is that you use a regulated broker with applicable licenses from a trusted authority. It is also extremely important that you feel comfortable with the broker’s trading platform and tools. If you are unsure and uncomfortable from the start, there is a high risk that you will never really get comfortable. We ourselves have tested many different brokers and it is something we recommend that you do too. At worst, you can always change in the future, but it’s so much better to match right from the start for smooth CFD trading.
A Couple Of The World’s Leading Brokers Today Offer CFDs are:
- ETX Capital
All the brokers we recommend are 100% safe to use and are licensed for CFD trading, but please note that your capital is at risk when trading. It would be inappropriate for us to recommend a service to you that we ourselves are not willing to use. We always put our customers’ safety as the top priority.
If you are unsure whether a broker you like offers CFD trading or not, you can always contact their customer service.
Similar Forms Of Investment
Because of its speculative nature, many people compare CFDs with other speculative investments. For example, we can draw similarities between CFD trading and binary options. The main difference is that binary options generally involve small amounts and that they have no leverage.
There are also many similarities between CFDs and futures trading. The difference is that futures trading is typically limited in time and that the buyer is obliged to sell at a certain time. CFDs are, as I said, more flexible and you, as the buyer, are control.
We would like to conclude by telling you that many leading authorities issue warnings to customers to take great caution when trading CFDs, especially CFD’s for new customers. On BullMarketz we agree 100% on this since safety is everything. In fact, there are many less reliable players in the investment market and it is important that you avoid them. Do not rely blindly on what others say, especially about their own products. Make sure you review the brokers and the tool itself and base your opinion on the third parties and reviews.