You have probably heard of the term a few times around friends and officemates and some had probably suggested for you to get into CFD Trading. But what is CFD exactly? Some people will even give you a vague description when asked saying something like “It’s just like Forex Trading” but without any specifics involved.
What is CFD exactly?
CFD means Contract for Difference and is a kind of agreement between a buyer and a seller or in the form of trading, the trader and the broker. The agreement will stipulate that one shall pay based on the difference between the current price position of an asset and the contract value during its time to the other party. The parties are obliged to pay when it has been determined where the direction of the actual price has moved based on the contract agreement.
CFD Trading is mainly done through speculative profits and some would get into them for hedging. One of the main reasons why a lot of traders get into CFDs its because it is a derivative which means that the main point of the trade is to engage in it without being hassled to physically own any underlying asset.
What Kind of CFD Instruments exists?
Another great quality of trading CFDs is being able to literally have all underlying assets based on your trades:
- CFD on commodities
- CFD on metals etc.
- CFD on stocks.
- CFD on Forex (currency)
As of the moment, most traders would trade stocks as the most popular choice. As of this article, the current total number of financial instruments available for traders to choose from is at around 900 units which includes the different stocks from different major companies to even one of the most obscure firms in other countries. As mentioned earlier, the reason why CFDs are very popular is due to being able to engage in it without having to buy the stocks and are able to speculate on them instead.
Another reason why most get into CFDs is because of the low margin requirement, which is usually 2%. This is lower than the requirement in the stock market and becomes one of the basis for transacting through leveraged exposures.
Advantages in CFD trading
One of the few advantages There is a Huge selection of instruments and gives the trader so many options for diversification. Another reason that many would engage in trading is the high leverage that can be acquired in this trading which is up to 1:500. This is higher than that you can find in the stock market. Combine this with a low 2% margin requirement and you have the ability to diversify and ready yourself for better gains compared to other forms of trading. Anything that requires little capital can be very advantageous for traders
Another reason why most trade CFDs is being able to access all the available markets with just one platform. Most brokers in CFD offer different instruments from the global market and you as a trader will have a very easy process for trading given that access can be done in one platform.
Some markets may have capital restrictions during day trading. In CFD however, there are no type of restrictions on day trading.