A contract for difference, or as it is also called CFD, is a financial instrument by which a trader can earn money depending on fluctuations in the value of the asset that underlies the contract without possessing the asset itself.
When trading CFDs, you do not buy or sell anything. You enter into a contract stipulating the price difference for the asset you have chosen when opening and closing a transaction.
How to Trade CFDs?
Trading CFDs is quite simple. You select the asset that interests you and creates order. Do you think the price of an asset, for example, Amazon shares will rise? Open a buy position! Accordingly, if you think there will be a fall in asset price, open a sell position.
If the price changes in the direction you predicted, you earn a profit equal to the asset price when opening and closing a transaction.
What Assets Can You Trade Using CFDs?
CFDs are universal. They can be used to trade almost any financial instrument. Here are these:
- Forex – 60+ currency pairs
- Indices – stock indices from around the world, including the S&P 500 and DJ30.
- Raw materials – gold and other metals, oil and energy, various agricultural products.
- Shares – all the most significant public offering (IPOs) and shares of major global companies.
- Cryptocurrencies – bitcoin, litcoin, etherum, bitcoincash can all be traded using CFDs.
Benefits of CFDs
When trading through CFDs, leverage is applied. With leverage, a trader can make transactions with amounts that are many times higher than the size of his capital deposits.
This trading mode makes it possible to trade on the market with a relatively low initial deposit. As a result of this, CFD makes it possible to trade with small funds, and at the same time, receive a very substantial profit.
CFDs can be used not only by opening long (for buying) positions but also by opening short (for selling). And all this can be done by actually trading in air, i.e., not owning an underlying asset.
It is worth mentioning that previously, ordinary traders did not have such an opportunity, and only large professional investors had it.
Diversification of Investments
Well, of course, you should never put all your eggs in one basket. This can be risky sometimes. The more diversity you have, the lower the risk of loss of funds in the event of an adverse price change.
CFD trading can be carried out in many markets around the world, providing an opportunity for traders to choose the time of trading.
CFD traders can profit in both rising and falling market. You can open leverage for both buying and selling, using any market movement to your advantage.
Whether you are just starting out or a professional trader, CFD trading appeals to everyone. Beginners like the exposure offered by the CFD contract, which provides greater market access for less capital. Experienced traders are attracted by the ability to hedge their portfolio and diversify using CFDs.