Contracts for Difference, commonly known as CFDs, allow traders to speculate on the movement of assets in a wide variety of markets. CFDs are a convenient and easy way to speculate on an asset without ever actually owning it. When the contract closes, the investor will be paid (or have to pay) the difference between the opening and closing prices, adjusted for the number of shares.
CFD trading has increased in popularity over the last decade because they offer many key advantages:
- Convenient global access. CFDs aren't regulated like other exchanges, so CFD brokers can offer access to any global market across a single, simple platform.
- No trading fees. Unlike other assets, you don't need to pay any commission or stamp duty.
- Variety of options. You can buy and sell stock CFDs, but there are also lots of other options. Index, currency, treasury, commodity, and even sector CFDs are available.
- 24/7 access. Unlike more restrictive markets, CFD trading isn't exclusively completed during business hours.
- Incredible potential. You can significantly increase your portfolio's potential by utilizing leverage when trading CFDs, up to 1:50.
How a CFD Works
When you trade a CFD, you aren't buying or selling a physical asset. You're guessing on whether you believe the price for that asset is going to increase or decrease in the future. This is why the CFD market is much easier to access and fees are non-existent.
One difference you need to be aware of when trading CFDs is the spread. The spread is the difference between what you pay and the market value - and it will fluctuate a bit among each broker. If the spread is $1, for example, then your asset must appreciate $1 before it reaches the breakeven point, and then you will begin earning profits on any further gains.
Ideal Investment Opportunities
CFDs are perfect for investors who demand a bit of flexibility, which is one of the reasons they're so popular. If you're busy working during the day trading hours, for example, you might not have the ability to buy and sell stocks the way you'd like to.
For the investor who wants to stay organized, CFDs are also a great option. You'll be able to do all your trading with a single broker and still have access to an enormous global market. You won't run the risk of having to trade across several platforms and letting an opportunity slip past you.
Finally, CFDs are great for people who want to invest heavily in an expensive asset, but don't have the capital to do so. You can purchase more shares at a fraction of the cost and without any commission fees.
Trading CFDs Effectively
Like any trading market, you need a solid strategy to trade CFDs for a profit consistently. Here are some of the most common strategies employed by successful traders:
- Hedging. If you have long-term investments that you believe are due for a downward spell, shorting with CFDs could be a cheaper alternative to selling your shares and purchasing them again.
- Short-term trades. CFDs are the perfect market in which to make short trades because there aren't any stamp duties and you can trade on a margin.
- Trading pairs. If you notice that one company is trading far less than it should compared to another one, CFDs are a great way to exploit it. You can make a profit by using CFDs to short the overvalued company and go long on the undervalued one.
- Setting a stop-loss. Setting a hard stop-loss is vital if you want to protect your capital as you trade CFDs. Trading on leverage magnifies your wins, but it accelerates your losses as well. You need to be careful about mitigating your risk and pulling the plug before losing a large chunk of your bankroll.
It's important to remember that CFDs are a contract between the investor and the broker. You need to work with a broker that you know and trust. This is why you want to open an account here at Trade24. We offer incredible low spreads, personalized service, and trading systems held up to the highest standards. Click here to create an account with us and start trading today.