When you’re just starting off in investing or trading, you’ll encounter tons of new terms and concepts that will sound very complicated.
Yes, it will indeed be overwhelming, but learning these concepts is essential.
Start from the beginning. Start with getting to know all about assets and what types of assets are in the market.
From forex or foreign exchange to stocks to commodities and to CFDs.
It’s worth noting that each investor has different preferences and perspectives. So, it’s crucial to know the options and to try to find your niche or match.
CFDs or Contract for Difference might not sound as familiar as forex or stocks, but it’s a great start for aspiring traders. Perhaps some experts will even say that it’s an underrated asset.
So, What Are CFDs?
A Contract for Difference are agreements to exchange the literal difference in an asset’s value. It spans from the time when the contract is open to the time it closes.
Sounds complicated, right?
Well, to help you understand its difference from traditional trading, you need to understand the traditional way first.
If you wish to invest your hard-earned funds to a certain company, you’ll need to buy shares or stocks of the company. You’ll purchase the said stock at the current price given on the stock market.
The same process is applied when you want to invest in other assets such as gold, silver, or even oil. The first thing you’ll do is purchase a barrel of crude oil or gold.
After that, you’ll need to wait and see if the price actually increases. After it reaches your desired price, you would then sell the asset at that higher price. That way, you could make a profit from the difference.
That’s traditional trading.
On the other hand, CFDs work somehow similarly to traditional investing.
You’ll need to open a trade for your desired asset at the current price, then patiently wait for the price to either go up or down. Then, you can make a profit, or even a loss, from the difference in the price.
The biggest difference here with CFDs is that you don’t really own the asset.
A Contract for Difference reflects the said price of the asset, and instead of actually buying that asset, you would speculate on how the price’s fluctuation. Will it go up or down?
To put things into perspective, trading with CFDs gives you the chance to make a profit if a market price heads up or down.
Benefits of CFDs
Well, as you can guess, trading isn’t just all about the benefits. Investors should also study the negative side of this asset.
Of course, it’s already given that many brokers and brokerages there will offer you different reasons why you should trade with CFDs. Still, it’s crucial to stay vigilant, critical, and objective when selecting and weighing the pros and cons.
I could list a bunch of reasons for you and it would still vary depending on your broker.
Okay, so, here’s one of the biggest advantages of trading with CFDs. Leverage. I can probably guess that you already know all about leverages.
But for those who don’t, the usage of leverage means you can access a bigger volume of the asset you chose. Yes, bigger than what you could acquire in traditional trading with the funds you have available.
Still, depending on your instrument, your regular and your broker, you can access and open trades that are 500 times bigger in volume. And as for retail traders, there are instruments that allow you to trade more than 30 times your available capital.
Long- or Short-Term Trading?
Trading for long term or short term isn’t much of a problem for CFDs. Perhaps this is one of the main pros that you could have as a CFD trader.
In traditional trading, you make a profit when the market is going up. And vice versa. You loose funds whenever it goes down. Meaning, it potentially has a negative impact on your investments.
Meanwhile, for CFD trading, you can trade on both long term and short term periods. Amazing right? See, you could profit from both rising and falling markets.
It’s a Long List
The pros and advantages of CFDs are on a long list. And we could go on and on about it.
The CFD market has a wide range. You can even access currencies, from major pairs to exotic pairs.
And if you prefer indices, there are CFDs for indices.
Prefer oil and commodities? Worry not, you can trade WTI crude, Brent oil, gold, and more commodities with CFDs. From farmed commodities, to oil and even to tradable metals.
So, as you can imagine, the list really goes on and on for CFDs. You’re not limited.
Continuing this and further explaining CFDs will make this article thousands of words long. So, I suggest that you consult your broker about this. If not, you could go to sites that have accessible educational materials for you to indulge in such as Finance Brokerage.
Trading comes with risk. And the same goes with CFDs. It’s best to study and learn more about your desired path before you proceed with it. And remember to keep your trustworthy adviser, brokerage, and source.