Are you seeking to expand your trading experience? Try CFD trading.
What is CFD trading?
CFD is the short form of ‘Contract for difference,’ where a contract is signed between an investor and CFD broker for a short duration. CFD pays the difference between the current market value of an asset and its opening price when the contract is signed. It is the most popular method among commodities and FX traders to contemplate the rising and falling prices of stock indices, commodities, forex, shares, etc. more on CFDs here.
Nowadays, traders prefer online CFD trading rather than sweating in the stock exchange with traditional trading. It provides more ease, and they can speculate or trade from the comfort of their home. Also, it’s cheaper, faster, and the investor has more control and access to fundamental trading tools.
How does CFD trade work?
In CFD trading, the underlying asset is not owned physically, but the trader only speculates on its position in the market. The trader works between two opening and closing trades, meaning trade CFDs for an underlying asset’s buy and sell price.
Firstly, if the trader wants to buy a commodity because they believe the prices will rise, they will enter into an opening trade with the CFD provider, meaning they will open buy or long position.
In the second step, the CFD trader will reverse the first trade into a closing trade by entering a short position to sell the underlying assets.
However, if the opening trade is short selling, the closing out trade would be a buy or long position. The traders would have to pay the difference between the opening and closing price in both trades, or the CFD providers would pay the traders depending upon the price movements in the underlying market.
Benefits of trading CFDs:
CFDs are complex instruments and should only be used by experienced traders who can understand the risk of losing money and the position of volatile markets. If you know what trading CFDs mean, you can enjoy the potential benefits associated with it after opening a CFD trading account.
CFD traders do business on margin, which means they won’t have to pay the total price of holding an asset, only a fraction of it, which usually lies between 10% to 20% of underlying shares.
CFD contracts can rapidly increase your gain due to leverage in a short period and need only a small initial investment to fill in the margin. Furthermore, the CFD investor can go with short-selling without caring about the restrictions associated with traditional trading. You cannot sell on short positions if you don’t own the actual underlying asset.
Trading with one account:
Traditional trading requires you to have multiple accounts for each asset class, whereas in CFD, you need to hold only one account to cover the position of all asset classes like forex, gold, oil in global markets.
CFD trading usually doesn’t have a commission cost because the entire transaction cost is rolled into a bid/ask spread which is the difference between the buy and sell prices.