If you’re a beginner trader, you may have heard the term ‘CFDs’ thrown around. But what are CFDs? And how can you make them work for you?
CFD stands for Contracts for Difference. It’s a popular type of derivative trading which allows you to speculate on falling and rising prices of global financial instruments s(or markets) such as treasuries, currencies, commodities, indices, and shares.
When you do this type of trading, you’re able to trade on margin. If you think prices will go up, you’ll buy, and if you think prices will fall, you’ll sell.
The biggest benefit to trading CFDs is that you can trade against price movements without actually needing to buy or sell the instrument. CFDs give you higher leverage than other types of trading. You can also access global markets from one platform, 24/7.
CFDs are agreed upon between a broker and an investor. They involve a contract stipulating the payment of one party to another based on the price movement of the asset from the contract’s entry to its exit. This type of trading remains incredibly popular due to its excellent returns, high leverage opportunities, low investment minimums, and more. However, their low margin requirement means that retail traders need to be careful or they may face substantial losses.
There are several reasons why CFD trading is cheaper than real asset trading. Since you don’t actually own the asset you’re trading, you’ll save 0.5% on stamp duty. You also don’t need to pay commission fees, since you’re entering the contract at the asking price. The broker earns revenue through the spread. While trading professionally on stock exchanges will involve a fee, this isn’t the case with CFDs. You can also easily tap the market by setting up a margin account.
The low margin requirements also shouldn’t be overlooked. These can sometimes be as low as 3%, which means you can make large returns with small down payments. The global accessibility allows you to access everything from commodities to blue-chip stocks, presenting an excellent opportunity for even the least experienced investors to enter the market.