Investors can now opt for the CFD (Contract For Difference) to trade on the financial markets. CFD trading is relatively new to the investment market. In a short time, the demand for CFD trading has exploded. But what is a CFD, and where can you trade it?
What is CFD trading?
Trading CFDs or Contracts For Difference are investment instruments which enable investors to respond straightforwardly to price fluctuations in multiple markets. The underlying asset can be a share, index, commodity or currency. CFD trading is a leveraged product.
The investor enters into a contract with the CFD with the broker. He speculates on an upward or downward movement of the underlying asset value. The trade has no end date. The investor can conclude the contract after a few seconds or after a few years, depending on his objective. However, CFDs trading usually used for short periods.
CFD means a contract for difference. How it works precisely is best explained through an example:
The investor opens a long CFD trade (speculating on an increase) with an underlying value of 1 ounce of gold. The purchase of 1 ounce of gold on the stock exchange (via an ETF, for example) would cost the investor an amount of 1200 euros at a gold price of 1200 euros per ounce. To open CFDs trades, the investor only needs to have a certain margin in his account. Let’s say that the margin percentage, in this case, is 10%. The investor must then have 10% of 1200 euros = 120 euros in the margin on his account.
Now suppose that gold rises 120 euros in value to 1320 euros per ounce. The investor who has bought gold on the stock exchange then makes 120 euros profit. On his investment of 1200 euros that is a return of 10%.
The CFD trader receives the difference in 1 ounce of the gold price, between contract opening and closing times. That is 1320 – 1200 = 120 euros in this case. The profit for this investor is, therefore, 120 euros. The investment (margin) was also 120 euros. That, therefore, amounts to a profit of 100%. The leverage of this CFD was 100% / 10% = 10. We see here that the lower the margin, the higher the leverage.
So we work with margin. The investor never owns the underlying asset anytime during the contract.
The broker buys the underlying value on the stock exchange and requests an interest payment for this investment.
. The contract is entered into with the CFD trading provider as counterparty. In contrast to trading in shares, the investor with CFD trading broker does run a risk if the broker goes bankrupt.
CFD Trading Brokers
There are a large number of brokers active that offer trading in CFDs. It is worthwhile to compare the rates and the services offered. With many UK CFD trading providers, it is possible to open a demo account, without obligation. CFD Demo trading means that, for a few weeks and with fictitious money, you can get acquainted with trading CFDs and the broker’s trading platform.
The following brokers offer regulated UK CFD trading:
* Trading CFDs involves risks. Do not put more capital at risk than you are willing to lose. This article is not investment advice. Past yields do not guarantee the future.
What options CFDs trading offer?
CFD Trading offers many new opportunities to the private investor. For example, it is possible to trade 24 hours a day in a good number of underlying values. So you are not dependent on the opening hours of the fair. CFDs trading provides a significant advantage, enabling immediate access to markets traded across the globe, Utilising stop-loss orders and limiting orders, the investor can use this option to trade 24 hours a day.
For example, suppose that you want to take advantage of the rising oil price, but you want to invest for a maximum rate of $ 100 per barrel. The oil price fluctuates around $ 105 at that time and does not fall below $ 100 during the stock exchange’s opening hours. At 3 a.m., during trade-in Asia, the oil price drops rapidly to $ 99 and quickly recovers to above $ 100. By giving a purchase order limited to 100 dollars, you can purchase at the desired price while you sleep comfortably in your bed.
The same applies to stop-loss orders. These can also be specified and executed 24 hours a day.
The range of available underlying assets to trade on is immense at most UK CFD Trading providers. It often includes currency pairs, commodities, indices and thousands of shares listed worldwide.